[Granite State Bankshares Letterhead]
August 8, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
of Granite State Bankshares, Inc. ("Granite State") scheduled to be held on
Tuesday, September 23, 1997, at The Keene Country Club, West Hill Road,
Keene, New Hampshire, at 10:00 a.m., local time (the "Granite State Special
Meeting"). Notice of the Granite State Special Meeting, a Joint Proxy
Statement and a Proxy Card are enclosed.
The purpose of the Granite State Special Meeting is to consider and
vote upon an Agreement and Plan of Reorganization as amended (the
"Reorganization Agreement") dated as of April 29, 1997, among Granite State
and its wholly owned subsidiary, Granite Bank, and Primary Bank, a New
Hampshire chartered guaranty (stock) savings bank, and a related Agreement
and Plan of Merger as amended (the "Plan of Merger," and together with the
Reorganization Agreement, the "Agreement") between Primary Bank and Granite
Bank and joined in by Granite State, a copy of each of which is included as
Appendix A to the accompanying Joint Proxy Statement. The Agreement provides
for the merger of Primary Bank with and into Granite Bank (the "Merger") and
the conversion of each outstanding share of common stock of Primary Bank
into shares of common stock of Granite State based on an exchange ratio as
described in the attached Joint Proxy Statement.
The attached Joint Proxy Statement contains important information
concerning the Merger. We urge you to give it your careful attention.
The Board of Directors of Granite State has carefully considered and
approved the Agreement and believes that the Merger is in the best interests
of Granite State and its stockholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE AGREEMENT.
YOUR VOTE IS IMPORTANT. You are urged to sign, date and mail the
enclosed Proxy Card promptly in the postage-prepaid envelope provided. If
you attend the Granite State Special Meeting, you may vote in person even if
you have already mailed your Proxy Card.
On behalf of the Board of Directors and our employees, I wish to thank
you for your continued support. We appreciate your interest.
Sincerely yours,
/s/ Charles W. Smith
Charles W. Smith
Chairman and Chief Executive Officer
<PAGE>
[Primary Bank Letterhead]
August 8, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
of Primary Bank scheduled to be held on Wednesday, September 24, 1997, at
Monadnock Country Club, 49 High Street, Peterborough, New Hampshire, at
11:00 a.m., local time (the "Primary Bank Special Meeting"). Notice of the
Primary Bank Special Meeting, a Joint Proxy Statement and a Proxy Card are
enclosed.
The purpose of the Primary Bank Special Meeting is to consider and
vote upon an Agreement and Plan of Reorganization as amended (the
"Reorganization Agreement") dated as of April 29, 1997, among Primary Bank,
Granite State Bankshares, Inc. ("Granite State"), a New Hampshire
corporation, and its wholly owned subsidiary, Granite Bank, a New Hampshire-
chartered commercial bank, and a related Agreement and Plan of Merger as
amended (the "Plan of Merger," together with the Reorganization Agreement,
the "Agreement") between Primary Bank and Granite Bank and joined in by
Granite State, a copy of each of which is included as Appendix A to the
accompanying Joint Proxy Statement. The Agreement provides for the merger of
Primary Bank with and into Granite Bank (the "Merger") and the conversion of
each outstanding share of common stock of Primary Bank ("Primary Bank Common
Stock") into shares of common stock of Granite State ("Granite State Common
Stock") based on an Exchange Ratio as described in the attached Joint Proxy
Statement.
The attached Joint Proxy Statement contains important information
concerning the Merger. We urge you to give it your careful attention. The
Joint Proxy Statement will answer most questions that you might have,
including the following:
What am I being asked to vote on? You are being asked to vote on the
Agreement pursuant to which Primary Bank will merge with Granite Bank. The
terms of the Merger and the Agreement are described in detail in the section
of the Joint Proxy Statement titled "THE MERGER," and we ask that you read
it carefully before voting on the Agreement.
Why should I vote for the Merger? Your Board of Directors carefully
considered the terms of the Agreement and the Merger, and believe the
Agreement and the Merger is in the best interest of Primary Bank and its
stockholders. The Board has described the reasons for the Merger in the
section of the Joint Proxy Statement titled "THE MERGER--Reasons for the
Merger--Primary Bank's Reasons for the Merger." Please carefully read this
section as you decide whether or not to vote for the Agreement.
What is the position of Primary Bank's Board of Directors? The Board
of Directors of Primary Bank has carefully considered and approved the
Agreement and believes that the Merger is in the best interests of Primary
Bank and its stockholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE AGREEMENT.
How many shares will I receive? The number of shares of Granite State
common stock that will be received for each share of Primary Bank Common
Stock will be determined pursuant to an Exchange Ratio that is described in
detail in the Joint Proxy Statement. For more information regarding the
Exchange Ratio please read the section of the Joint Proxy Statement titled
"THE MERGER--Terms of the Merger--The Share Exchange."
<PAGE>
What do I need to do to vote on the Merger? YOUR VOTE IS IMPORTANT.
You are urged to sign, date and mail the enclosed Proxy Card promptly in the
postage-prepaid envelope provided. If you attend the Primary Bank Special
Meeting, you may vote in person even if you have already mailed your Proxy
Card.
If my shares are held in my broker's name, will my broker vote my
shares for me? Unless you deliver a proxy to your broker with specific
instructions, shares held in street name by such brokers will not be voted
and will have the same effect as a vote against the Agreement.
How many votes are needed to approve the Agreement? The affirmative
vote of two-thirds of the issued and outstanding shares of Primary Bank
Common Stock entitled to vote at the Primary Bank Special Meeting is
required to approve the Agreement.
What will happen if I don't vote at all? If you do not vote it will
have the same effect as a vote against the Agreement.
Should I send in my stock certificate now? The conversion of Primary
Bank Common Stock into Granite State Common Stock will occur automatically
when the Merger is completed. As soon as practicable after the Merger is
completed Primary Bank stockholders will receive a transmittal form which
will contain instructions with respect to the surrender of certificates
representing Primary Bank Common Stock to be exchanged for Granite State
Common Stock. YOU SHOULD NOT FORWARD PRIMARY BANK COMMON STOCK CERTIFICATES
UNTIL YOU HAVE RECEIVED TRANSMITTAL FORMS. YOU SHOULD NOT RETURN STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD.
Will the surviving company's common stock be listed on a stock
exchange? The Granite State Common Stock is currently listed on the Nasdaq
National Market, and will continue to be so listed immediately at the time
of the completion of the Merger.
When do you expect the Merger to be completed? We believe that the
Merger will be completed within 60 days of the Primary Bank Special Meeting,
although we cannot assure you that the Merger will be completed by such
time.
The Board of Directors of Primary Bank has carefully considered and
approved the Agreement and believes that the Merger is in the best interests
of Primary Bank and its stockholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE AGREEMENT.
YOUR VOTE IS IMPORTANT. You are urged to sign, date and mail the
enclosed Proxy Card promptly in the postage-prepaid envelope provided. If
you attend the Primary Bank Special Meeting, you may vote in person even if
you have already mailed your Proxy Card.
On behalf of the Board of Directors and our employees, I wish to thank
you for your continued support. We appreciate your interest.
Sincerely yours,
/s/ Charles F. Whittemore
Charles F. Whittemore
Chairman of the Board
<PAGE>
GRANITE STATE BANKSHARES, INC.
122 WEST STREET
KEENE, NEW HAMPSHIRE 03431
(603) 352-1600
--------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 23, 1997
--------------------
Notice Is Hereby Given that a Special Meeting of Stockholders of
Granite State Bankshares, Inc. ("Granite State") is scheduled to be held on
Tuesday, September 23, 1997, at The Keene Country Club, West Hill Road,
Keene, New Hampshire, at 10:00 a.m., local time (the "Granite State Special
Meeting").
A Proxy Card and a Joint Proxy Statement for the Granite State Special
Meeting are enclosed. The Granite State Special Meeting is for the purpose
of considering and voting upon the following matters:
1. The approval of the Agreement and Plan of Reorganization as
amended (the "Reorganization Agreement") dated as of April 29, 1997,
among Granite State and its wholly owned subsidiary, Granite Bank, and
Primary Bank, a New Hampshire chartered guaranty (stock) savings bank,
and a related Agreement and Plan of Merger as amended (the "Plan of
Merger," and together with the Reorganization Agreement, the
"Agreement") between Primary Bank and Granite Bank and joined in by
Granite State, a copy of each of which is included as Appendix A to
the accompanying Joint Proxy Statement and incorporated by reference
herein, pursuant to which: (i) Primary Bank would be merged with and
into Granite Bank (the "Merger"); and (ii) each outstanding share of
common stock of Primary Bank, par value $.01 per share (except as
otherwise provided in the Agreement), would be converted into a number
of shares of Granite State common stock, par value $1.00 per share
("Granite State Common Stock"), determined in accordance with the
terms of the Agreement, and cash in lieu of any fractional share,
resulting in the issuance of up to 4,558,854 shares of Granite State
Common Stock in connection with the proposed Merger; and
2. Such other matters as may properly come before the Granite
State Special Meeting or any adjournments thereof, including proposals
to adjourn the Granite State Special Meeting to permit the further
solicitation of proxies by the Board of Directors in the event that
there are not sufficient votes to approve any proposal at the time of
the Granite State Special Meeting; provided, however, that no proxy
which is voted against the foregoing proposal will be voted in favor
of an adjournment to solicit further proxies.
The Board of Directors has established July 30, 1997 as the record
date for the determination of stockholders entitled to notice of and to vote
at the Granite State Special Meeting and at any adjournments thereof. Only
holders of Granite State Common Stock as of the close of business on that
date will be entitled to notice of and to vote at the Granite State Special
Meeting or any adjournments thereof. A list of stockholders entitled to vote
at the Granite State Special Meeting will be available at 122 West Street,
Keene, New Hampshire for a period of 20 days prior to the Granite State
Special Meeting and will also be available for inspection at the Granite
State Special Meeting itself.
By Order of the Board of Directors,
/s/ Charles B. Paquette
Charles B. Paquette
Corporate Secretary
Keene, New Hampshire
August 8, 1997
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE GRANITE STATE THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. PLEASE
DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
<PAGE>
PRIMARY BANK
35 MAIN STREET
PETERBOROUGH, NEW HAMPSHIRE 03458
(603) 924-7142
--------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 24, 1997
--------------------
Notice Is Hereby Given that a Special Meeting of Stockholders of
Primary Bank is scheduled to be held on Wednesday, September 24, 1997, at
Monadnock Country Club, 49 High Street, Peterborough, New Hampshire, at
11:00 a.m., local time (the "Primary Bank Special Meeting").
A Proxy Card and a Joint Proxy Statement for the Primary Bank Special
Meeting are enclosed. The Primary Bank Special Meeting is for the purpose of
considering and voting upon the following matters:
1. The approval of the Agreement and Plan of Reorganization as
amended (the "Reorganization Agreement") dated as of April 29, 1997,
among Granite State Bankshares, Inc. ("Granite State") and its wholly
owned subsidiary, Granite Bank, a New Hampshire-chartered commercial
bank, and Primary Bank, and a related Agreement and Plan of Merger as
amended (the "Plan of Merger," and together with the Reorganization
Agreement, the "Agreement") between Primary Bank and Granite Bank and
joined in by Granite State, a copy of each of which is included as
Appendix A to the accompanying Joint Proxy Statement and incorporated
by reference herein, pursuant to which: (i) Primary Bank would be
merged with and into Granite Bank (the "Merger"); and (ii) each
outstanding share of common stock of Primary Bank, par value $.01 per
share ("Primary Bank Common Stock") (except as otherwise provided in
the Agreement), would be converted into a number of shares of common
stock of Granite State, par value $1.00 per share, determined in
accordance with the terms of the Agreement, and cash in lieu of any
fractional share.
2. Such other matters as may properly come before the Primary
Bank Special Meeting or any adjournments thereof, including proposals
to adjourn the Primary Bank Special Meeting to permit the further
solicitation of proxies by the Board of Directors in the event that
there are not sufficient votes to approve any proposal at the time of
the Primary Bank Special Meeting; provided, however, that no proxy
which is voted against the foregoing proposal will be voted in favor
of an adjournment to solicit further proxies.
The Board of Directors has established July 30, 1997 as the record
date for the determination of stockholders entitled to notice of and to vote
at the Primary Bank Special Meeting and at any adjournments thereof. Only
holders of the Primary Bank Common Stock as of the close of business on that
date will be entitled to notice of and to vote at the Primary Bank Special
Meeting or any adjournments thereof.
By Order of the Board of Directors,
/s/ Elizabeth M. Rank
Elizabeth M. Rank
Corporate Secretary
Peterborough, New Hampshire
August 8, 1997
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE PRIMARY BANK THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. PLEASE
DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
<PAGE>
GRANITE STATE BANKSHARES, INC.
PRIMARY BANK
JOINT PROXY STATEMENT
---------------------
This Joint Proxy Statement relates to the proposed merger (the "Merger")
of Primary Bank, a New Hampshire-chartered guaranty (stock) savings bank, with
and into Granite Bank, a New Hampshire-chartered commercial bank that is the
wholly owned subsidiary of Granite State Bankshares, Inc. ("Granite State"), a
New Hampshire corporation, and the conversion of each outstanding share of
common stock, par value $.01 per share, of Primary Bank ("Primary Bank Common
Stock") into shares of common stock, par value $1.00 per share, of Granite
State ("Granite State Common Stock") based on an exchange ratio, and the
payment of cash in lieu of any fractional share. The terms of the Merger and
conversion of shares of Primary Bank Common Stock into shares of Granite State
Common Stock are set forth in an Agreement and Plan of Reorganization as
amended (the "Reorganization Agreement") dated as of April 29, 1997, among
Granite State, Granite Bank and Primary Bank, and a related Agreement and Plan
of Merger as amended (the "Plan of Merger," and together with the
Reorganization Agreement, the "Agreement") between Primary Bank and Granite
Bank and joined in by Granite State. A copy of the Agreement is included as
APPENDIX A to the accompanying Joint Proxy Statement.
This Joint Proxy Statement is being furnished to holders of Granite State
Common Stock in connection with the solicitation of proxies by the Board of
Directors of Granite State for use at a special meeting of Stockholders of
Granite State (the "Granite State Special Meeting"), scheduled to be held on
Tuesday, September 23, 1997, at The Keene Country Club, West Hill Road, Keene,
New Hampshire, at 10:00 a.m., local time, and at any adjournments or
postponements thereof. At the Granite State Special Meeting the holders of
Granite State Common Stock will consider and vote upon a proposal to approve
and adopt the Agreement and the transactions contemplated thereby, including
the issuance of shares of Granite State Common Stock in the Merger, and such
other matters as may properly come before the Granite State Special Meeting,
including proposals to adjourn the meeting to permit further solicitation of
proxies if necessary.
This Joint Proxy Statement is being furnished to holders of Primary Bank
Common Stock in connection with the solicitation of proxies by the Board of
Directors of Primary Bank for use at a special meeting of Stockholders of
Primary Bank scheduled to be held on Wednesday, September 24, 1997, at
Monadnock Country Club, 49 High Street, Peterborough, New Hampshire, at 11:00
a.m., local time, and at any adjournments or postponements thereof (the
"Primary Bank Special Meeting," and, together with the Granite State Special
Meeting, the "Special Meetings"). At the Primary Bank Special Meeting the
holders of Primary Bank Common Stock will consider and vote upon a proposal to
approve and adopt the Agreement and the transactions contemplated thereby, and
such other matters as may properly come before the Primary Bank Special
Meeting, including proposals to adjourn the meeting to permit further
solicitation of proxies if necessary.
This Joint Proxy Statement, and the accompanying notice and Proxy Card,
are first being mailed to stockholders of Granite State and Primary Bank on or
about August 12, 1997.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY GRANITE STATE, GRANITE BANK OR PRIMARY
BANK. THIS JOINT PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION
<PAGE>
OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS JOINT PROXY STATEMENT NOR ANY DISTRIBUTION OF SECURITIES
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF GRANITE STATE OR PRIMARY BANK
SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
THE SECURITIES ISSUED IN THE MERGER ARE NOT DEPOSITS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTED.
All information concerning Granite State and its subsidiaries contained
herein, incorporated herein by reference or supplied herewith has been
furnished by Granite State, and all information concerning Primary Bank
contained herein, incorporated herein by reference or supplied herewith has
been furnished by Primary Bank.
AVAILABLE INFORMATION
Granite State and Primary Bank are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith Granite State files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"), and Primary Bank files reports, proxy statements and other
information with the FDIC. Such reports, proxy statements and other information
filed by Granite State with the Commission can be inspected and copied at the
offices of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center (13th Floor), New York, New York 10006. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, and from the web site that the Commission maintains at
http://www.sec.gov. Reports, proxy statements and other information filed by
Primary Bank with the FDIC may be obtained from the FDIC by calling (202)
898-8913, and may be inspected and copied at the FDIC's offices, Registration,
Disclosure and Securities Operation Unit, Public Files, 1776 F Street, N.W.,
6th Floor, Washington, D.C. 20549.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.............................................................................. 1
The Parties to the Agreement....................................................... 1
The Granite State Special Meeting.................................................. 2
The Primary Bank Special Meeting................................................... 3
The Merger......................................................................... 5
Differences in Stockholder Rights.................................................. 7
Management and Operations after the Merger......................................... 8
Certain Related Transactions....................................................... 8
Interests of Certain Persons in the Merger......................................... 8
Comparative Per Common Share Data.................................................. 9
GRANITE STATE SELECTED FINANCIAL DATA................................................ 12
PRIMARY BANK SELECTED FINANCIAL DATA................................................. 13
PRO FORMA COMBINED FINANCIAL INFORMATION............................................. 14
Pro Forma Unaudited Combined Condensed Balance Sheet as of March 31, 1997.......... 15
Pro Forma Unaudited Combined Condensed Statements of Income........................ 16
GRANITE STATE AND GRANITE BANK....................................................... 19
Granite State...................................................................... 19
Granite Bank....................................................................... 19
PRIMARY BANK......................................................................... 19
THE SPECIAL MEETINGS................................................................. 20
The Granite State Special Meeting.................................................. 20
The Primary Bank Special Meeting................................................... 21
THE MERGER........................................................................... 23
Background of the Merger........................................................... 23
Reasons for the Merger............................................................. 27
Recommendation of the Boards of Directors.......................................... 29
Terms of the Merger................................................................ 29
Opinion of Financial Advisor to Granite State...................................... 31
Opinion of Financial Advisor to Primary Bank....................................... 37
Effective Date of the Merger....................................................... 42
Exchange of Primary Bank Stock Certificates........................................ 42
Conditions to the Merger........................................................... 43
Regulatory and Other Approvals..................................................... 44
Representations and Warranties..................................................... 45
Business Pending the Merger........................................................ 46
No Solicitation of Bids............................................................ 47
Amendments, Extensions and Waivers................................................. 47
Termination; Effect of Termination................................................. 47
Management and Operations After the Merger......................................... 48
<PAGE>
Employee Benefits.................................................................. 49
Accounting Treatment............................................................... 49
Certain Federal Income Tax Consequences............................................ 50
Expenses........................................................................... 51
Exemption from Registration........................................................ 51
Resale of Granite State Common Stock............................................... 52
Rights of Dissenting Stockholders.................................................. 52
INTERESTS OF CERTAIN PERSONS IN THE MERGER........................................... 53
Stock Options...................................................................... 53
Indemnification.................................................................... 54
Other.............................................................................. 54
CERTAIN RELATED TRANSACTIONS......................................................... 55
Stock Option Agreement............................................................. 55
INFORMATION WITH RESPECT TO GRANITE STATE............................................ 57
General............................................................................ 57
Market Price of and Dividends on Granite State Common Stock and Related Stockholder
Matters........................................................................... 58
INFORMATION WITH RESPECT TO PRIMARY BANK............................................. 58
General............................................................................ 58
Market Price of and Dividends on Primary Bank Common Stock and Related Stockholder
Matters........................................................................... 58
COMPARISON OF STOCKHOLDER RIGHTS..................................................... 59
Directors.......................................................................... 59
Stockholders' Meetings............................................................. 60
Required Stockholder Votes......................................................... 61
Amendment of Bylaws................................................................ 62
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................................. 62
LEGAL MATTERS........................................................................ 62
STOCKHOLDER PROPOSALS................................................................ 62
OTHER MATTERS........................................................................ 63
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................... 63
APPENDICES
A. Agreement and Plan of Reorganization by and among Granite State, Granite Bank and
Primary Bank dated as of April 29, 1997 as amended including as Annex A the
Agreement and Plan of Merger among Granite Bank and Primary Bank and joined in
by Granite State............................................................... A-1
B. Fairness Opinion of Friedman, Billings, Ramsey & Co.............................. B-1
C. Fairness Opinion of Northeast Capital and Advisory, Inc.......................... C-1
D. New Hampshire Revised Statutes Sections 293-A: 13.01-.31 and 388:13 (the
"Dissenters' Rights Statute")................................................... D-1
</TABLE>
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained or incorporated by
reference in this Joint Proxy Statement and the Appendices hereto. A copy of
the Agreement (excluding schedules thereto), is included as APPENDIX A to this
Joint Proxy Statement and reference is made thereto for a complete description
of the terms of the Merger. Stockholders are urged to read carefully this
entire Joint Proxy Statement, including the Appendices hereto.
THE PARTIES TO THE AGREEMENT
Granite State and Granite Bank. Granite State, a New Hampshire
Corporation, is the holding company for Granite Bank, a New Hampshire-chartered
commercial bank headquartered in Keene, New Hampshire. As of March 31, 1997,
Granite State had total consolidated assets of $377.3 million, deposits of
$317.6 million and stockholders' equity of $32.4 million. Granite Bank has been
and continues to be a community-oriented commercial bank offering a variety of
financial services. The principal business of Granite Bank consists of
attracting deposits from the general public and underwriting loans secured by
residential and commercial real estate and other loans. Granite Bank also
originates fixed-rate residential real estate loans for sale in the secondary
mortgage market. Granite State operates nine full-service offices and an
additional 13 remote automatic teller machines and serves Cheshire,
Hillsborough, Strafford and Rockingham counties, New Hampshire. In addition,
Granite Bank has filed an application with the Banking Department of the State
of New Hampshire, seeking permission to open a full-service office in Nashua,
New Hampshire.
The executive offices of Granite State are located at 122 West Street,
Keene, New Hampshire 03431, and the telephone number is (603) 352-1600. See
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"GRANITE STATE SELECTED FINANCIAL DATA," "GRANITE STATE AND GRANITE BANK,"
"INFORMATION WITH RESPECT TO GRANITE STATE," AND "DESCRIPTION OF GRANITE STATE
COMMON STOCK."
Primary Bank. Primary Bank is a New Hampshire-chartered guaranty (stock)
savings bank headquartered in Peterborough, New Hampshire. As of March 31,
1997, Primary Bank had total assets of $435.7 million, deposits of $308.2
million and stockholders' equity of $28.8 million. Primary Bank is a
community-oriented savings bank offering a variety of financial services, with
a focus on the state's middle-market business community. The principal business
of Primary Bank consists of attracting deposits from the general public, with a
focus on consumer demand deposit accounts, and underwriting loans secured by
residential and commercial real estate and other loans. Primary Bank operates
ten full-service offices and five free-standing automatic teller machines
serving Cheshire, Hillsborough and Merrimack counties, New Hampshire.
The executive offices of Primary Bank are located at 35 Main Street,
Peterborough, New Hampshire 03458, and the telephone number is (603) 924-7142.
See "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"PRIMARY BANK SELECTED FINANCIAL DATA," "PRIMARY BANK" and "INFORMATION WITH
RESPECT TO PRIMARY BANK."
<PAGE>
THE GRANITE STATE SPECIAL MEETING
Meeting Date. The Granite State Special Meeting will be held at The Keene
Country Club, West Hill Road, Keene, New Hampshire, on Tuesday, September 23,
1997 at 10:00 a.m., local time.
Record Date. The record date for the Granite State Special Meeting is
July 30, 1997 (the "Granite State Record Date"). Only holders of record of
Granite State Common Stock at the close of business on the Granite State Record
Date will be entitled to receive notice of, and to vote at, the Granite State
Special Meeting.
Matters to be Considered. At the Granite State Special Meeting, holders
of Granite State Common Stock will consider and vote upon the approval of the
Agreement and the transactions contemplated thereby, including the Merger and
the issuance by Granite State of shares of Granite State Common Stock in
exchange for shares of Primary Bank Common Stock in accordance with the terms
of the Agreement, and the payment of cash in lieu of any fractional share.
Granite State stockholders may also consider and vote upon such other matters
as are properly brought before the Granite State Special Meeting, including
proposals to adjourn the Granite State Special Meeting to permit the further
solicitation of proxies by Granite State's Board of Directors in the event that
there are not sufficient votes to approve any proposal at the time of the
Granite State Special Meeting; provided, however, that any proxy which is voted
against approval of the Agreement will not be voted in favor of adjournment to
solicit further proxies for such proposal. See "THE SPECIAL MEETINGS--The
Granite State Special Meeting."
Vote Required. New Hampshire law requires that the Merger be approved by
Granite Bank's stockholders. Granite State, which owns 100% of Granite Bank's
common stock, will vote to approve the Merger. Although neither applicable New
Hampshire law nor the Articles of Incorporation of Granite State requires the
stockholders of Granite State to approve the Agreement, the rules and
regulations of the Nasdaq National Market require that the issuance of shares
of Granite State Common Stock in connection with the Merger be approved by the
affirmative vote of the holders of a majority of the shares cast by the holders
of Granite State Common Stock eligible to vote. Moreover, to permit greater
shareholder participation in the strategic direction of Granite State, Granite
State's Board of Directors has determined to permit Granite State stockholders
to vote on the approval of the Agreement pursuant to which the shares of
Granite State Common Stock will be issued, and will require that the Agreement
be approved by the affirmative vote of the holders of a majority of the shares
cast by the holders of Granite State Common Stock eligible to vote. However,
under New Hampshire law, Granite State stockholders will not have dissenters'
rights as result of the Board's decision to permit them to vote on the
Agreement.
As of the Granite State Record Date there were approximately 759 record
holders of outstanding Granite State Common Stock and 3,028,437 shares of
Granite State Common Stock entitled to vote at the Granite State Special
Meeting. Shares represented by all properly executed proxies received prior to
the Granite State Special Meeting and not revoked prior to exercise will be
voted in the manner specified by the holder thereof. Executed proxies which do
not contain voting instructions will be voted in favor of approval and adoption
of the Agreement. Abstentions may be specified on the Proxy Card. Nonvoting
shares, abstentions and proxies without specific instructions delivered to
brokers by beneficial owners of shares held in street name by such brokers
("broker non-votes") will not be counted as votes cast for purposes of
determining whether a majority has been attained and therefore will have no
effect on the vote to approve the Agreement.
It is not expected that any matter, other than those referred to herein,
will be brought before the Granite State Special Meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with their judgment with respect to such matters.
<PAGE> 2
The presence, in person or by proxy, of at least a majority of the shares
of Granite State Common Stock entitled to vote is necessary to constitute a
quorum at the Granite State Special Meeting. Granite State intends to count the
shares of Granite State Common Stock present in person at the Granite State
Special Meeting but not voting ("non-voting shares"), shares of Granite State
Common Stock for which it has received proxies but with respect to which
holders of shares have abstained on any matter (abstentions), and broker
non-votes, as present at the Granite State Special Meeting for purposes of
determining the presence or absence of a quorum for the transaction of
business. With a quorum, or in the absence of such, the affirmative vote of a
majority of shares of Granite State Common Stock represented at the Granite
State Special Meeting may authorize the adjournment of the meeting.
Proxies. Any proxy given pursuant to this solicitation or otherwise may
be revoked by the person giving it at any time before it is voted either by
delivering to the Secretary of Granite State at 122 West Street, Keene, New
Hampshire 03431 on or before the taking of the vote at the Granite State
Special Meeting, a written notice of revocation bearing a later date than the
date of the proxy or a later dated proxy relating to the same shares, or by
attending the Granite State Special Meeting and voting in person. Attendance at
the Granite State Special Meeting will not in itself constitute the revocation
of a proxy. Moreover, a stockholder whose shares are not registered in his or
her name must provide appropriate documentation from the record holder to vote
personally at the Granite State Special Meeting.
Security Ownership. As of the Granite State Record Date, directors and
executive officers of Granite State and their affiliates were beneficial owners
of 556,151 shares (excluding shares underlying unvested stock options that are
not scheduled to vest within 60 days of the Granite State Record Date), or
17.9%, of the then outstanding shares of Granite State Common Stock. The
directors and senior executive officers of Granite State have entered into
voting agreements with Primary Bank whereby such persons have agreed to vote or
cause to be voted the shares of Granite State Common Stock eligible to be voted
by them (481,661 shares in the aggregate) for approval and adoption of the
Agreement at the Granite State Special Meeting. As of the Granite State Record
Date, directors and executive officers of Primary Bank and their affiliates did
not own shares of Granite State Common Stock.
THE PRIMARY BANK SPECIAL MEETING
Meeting Date. The Primary Bank Special Meeting will be held at Monadnock
Country Club, 49 High Street, Peterborough, New Hampshire, on Wednesday,
September 24, 1997 at 11:00 a.m., local time.
Record Date. The record date for the Primary Bank Special Meeting is July
30, 1997 (the "Primary Bank Record Date"). Only holders of record of Primary
Bank Common Stock at the close of business on the Primary Bank Record Date will
be entitled to receive notice of, and to vote at, the Primary Bank Special
Meeting.
Matters to be Considered at the Meeting. At the Primary Bank Special
Meeting, holders of Primary Bank Common Stock will consider and vote upon the
approval of the Agreement and the transactions contemplated thereby, including
the Merger and the conversion of each outstanding share of Primary Bank Common
Stock into a number of shares of Granite State Common Stock determined in
accordance with the terms of the Agreement, and cash in lieu of any fractional
share. Primary Bank stockholders may also consider and vote upon such other
matters as are properly brought before the Primary Bank Special Meeting,
including proposals to adjourn the Primary Bank Special Meeting to permit the
further solicitation of proxies by Primary Bank's Board of Directors in the
event that there are not sufficient votes to approve any proposal at the time
of the Primary Bank Special Meeting; provided, however, that any proxy which is
voted against approval of
<PAGE> 3
the Agreement will not be voted in favor of adjournment to solicit further
proxies for such proposal. See "THE SPECIAL MEETINGS--The Primary Bank Special
Meeting."
Vote Required. The affirmative vote of the holders of two-thirds of the
issued and outstanding shares of Primary Bank Common Stock entitled to vote at
the Primary Bank Special Meeting is required to approve the Agreement. As of
the Primary Bank Record Date there were approximately 586 record holders of
outstanding Primary Bank Common Stock and 2,088,865 shares of Primary Bank
Common Stock entitled to vote at the Primary Bank Special Meeting. Shares
represented by all properly executed proxies received prior to the Primary Bank
Special Meeting and not revoked prior to exercise will be voted in the manner
specified by the holders thereof. Executed proxies which do not contain voting
instructions will be voted in favor of approval and adoption of the Agreement.
Abstentions may be specified on the Proxy Card. For the vote on the Agreement,
abstentions and broker non-votes will have the same effect as a negative vote
because the affirmative vote of not less than two-thirds of the outstanding
shares of Primary Bank Common Stock is required to approve the Agreement.
It is not expected that any matter, other than those referred to herein,
will be brought before the Primary Bank Special Meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with their judgment with respect to such matters.
The presence, in person or by proxy, of a majority of the outstanding
shares of Primary Bank Common Stock is necessary to constitute a quorum at the
Primary Bank Special Meeting. Primary Bank intends to count non-voting shares,
abstentions and broker non-votes as present at the Primary Bank Special Meeting
for purposes of determining the presence or absence of a quorum for the
transaction of business. In the absence of a quorum, the affirmative vote of a
majority of shares of Primary Bank Common Stock present at the Primary Bank
Special Meeting may authorize the adjournment of the meeting. With a quorum
present, the affirmative vote of a majority of votes cast in person or by proxy
may authorize adjournment of the Primary Bank Special Meeting.
Proxies. Any proxy given pursuant to this solicitation or otherwise may
be revoked by the person giving it at any time before it is voted either by
delivering to the Clerk of Primary Bank at 35 Main Street, Peterborough, New
Hampshire 03458 on or before the taking of the vote at the Primary Bank Special
Meeting, a written notice of revocation bearing a later date than the date of
the proxy or a later dated proxy relating to the same shares or by attending
the Primary Bank Special Meeting and voting in person. Attendance at the
Primary Bank Special Meeting will not in itself constitute the revocation of a
proxy. Moreover, if you are a stockholder whose shares are not registered in
your own name, you will need appropriate documentation from your record holder
to vote personally at the Primary Bank Special Meeting.
Security Ownership. As of the Primary Bank Record Date, directors and
senior executive officers of Primary Bank and their affiliates were beneficial
owners of 507,181 shares (including shares underlying all stock options), or
24.3%, of the then outstanding shares of Primary Bank Common Stock. The
directors and senior executive officers of Primary Bank have entered into
Affiliate Agreements with Granite State whereby such persons have agreed to
vote or cause to be voted the shares of Primary Bank Common Stock eligible to
be voted by them (221,759 shares in the aggregate, or 10.6% of the outstanding
shares) for approval and adoption of the Agreement at the Primary Bank Special
Meeting. As of the Primary Bank Record Date, directors and senior executive
officers of Granite State and their affiliates owned 1,104 shares of Primary
Bank Common Stock. It is expected that such shares will be voted in favor of
the proposals presented for vote at the Primary Bank Special Meeting.
<PAGE> 4
THE MERGER
Terms of the Merger. At the effective date of the Merger (the "Effective
Date"), Primary Bank will be merged with and into Granite Bank. Granite Bank,
as the surviving entity in the Merger, and Granite State's corporate status
will continue unaffected by the Merger. Also on the Effective Date, each share
of Primary Bank Common Stock issued and outstanding immediately prior to the
Effective Date will be converted into a number of shares of Granite State
Common Stock determined based on the Exchange Ratio described below, and cash
in lieu of any fractional share of Granite State Common Stock.
The number of shares of Granite State Common Stock to be received for
each share of Primary Bank Common Stock (the "Exchange Ratio") will depend on
the average of the inside closing bid price of Granite State Common Stock on
the Nasdaq National Market for each of the twenty consecutive trading days
ending on the fifth business day before the Effective Date (the "Granite State
Trading Price"). The Exchange Ratio shall be determined as follows: (i) if the
Granite State Trading Price is greater than or equal to $13.533 and less than
or equal to $16.917, then the Exchange Ratio shall be equal to $25.25 divided
by the Granite State Trading Price; (ii) if the Granite State Trading Price is
greater than $16.917 and less than or equal to $18.185, then the Exchange Ratio
shall be equal to 1.4926; (iii) if the Granite State Trading Price is greater
than $18.185, then the Exchange Ratio shall be equal to $27.144 divided by the
Granite State Trading Price; or (iv) if the Granite State Trading Price is less
than $13.533, then the Exchange Ratio shall be equal to 1.8658. If the Granite
State Trading Price is less than $13.533, then Primary Bank shall also have the
right to terminate the Agreement. See "THE MERGER--Termination; Effect of
Termination."
The following table shows the Exchange Ratio at various Granite State
Trading Prices together with the consideration to be received for each share of
Primary Bank, based on the Granite State Trading Price and the Exchange Ratio.
Because the Granite State Trading Price is an average price calculated over a
period of time, the market price of Granite State Common Stock at the Effective
Date could differ from the Granite State Trading Price used to determine the
Exchange Ratio, and the actual value of the shares issued in the Merger
therefore could differ from the amount set forth in the following table:
<TABLE>
<CAPTION>
GRANITE STATE CONSIDERATION FOR EACH
TRADING PRICE EXCHANGE RATIO <F1> PRIMARY BANK SHARE
------------- ------------------- ----------------------
<S> <C> <C>
more than $18.185 $27.144 divided by Granite $27.14
State Trading Price <F2>
more than $16.917, to $18.185 1.4926 $25.25 to $27.14
$13.533 to $16.917 1.8658 to 1.4926 $25.25
less than $13.533 1.8658 <F3> $25.25 or less <F3>
<FN>
- --------------------
<F1> The Exchange Ratio represents the number of shares of Granite State
Common Stock that would be received for each share of Primary Bank Common
Stock. For example, if the Granite State Trading Price is more than
$16.917, to $18.185, then 1.4926 shares of Granite State Common Stock
would be received for each share of Primary Bank Common Stock.
<F2> If the Granite State Trading Price equals $18.186 then the Exchange Ratio
will be 1.4926. The Exchange Ratio will decrease as the hypothetical
Granite State Trading Price increases above $18.186.
<F3> Primary Bank may, but need not, terminate the Agreement if the Granite
State Trading Price is less than $13.533.
</FN>
</TABLE>
<PAGE> 5
The percentage of the outstanding shares of Granite State Common Stock
immediately following the completion of the Merger that would have been
converted from shares of Primary Bank Common Stock into shares of Granite State
Common Stock in connection with the Merger will range from approximately 59.2%
(if the Granite State Trading Price is less than $13.533) to approximately
53.8% if the Granite State Trading Price is $18.185, and decrease below 53.8%
as the hypothetical Granite State Trading Price increases above $18.185. The
last reported sale price of Granite State Common Stock on July 30, 1997 was at
a price of $20.625. If the Granite State Trading Price were equal to such
price, for example, then the Exchange Ratio and the number of shares of Granite
State Common Stock that would be received for each share of Primary Bank Common
Stock would be 1.3161. The actual Granite State Trading Price will not be
determined until the fifth business day before the Effective Date. Because the
Effective Date may be more than five days after the date of the Special
Meetings, there can be no assurance of the actual Granite State Trading Price
at the time of such meetings. See "INFORMATION WITH RESPECT TO GRANITE STATE"
and "INFORMATION WITH RESPECT TO PRIMARY BANK" for information regarding
historical price performance of Granite State Common Stock and Primary Bank
Common Stock. For a more complete description of the Agreement and the terms of
the Merger, see "THE MERGER--Terms of the Merger."
Dissenters' Rights of Appraisal. Holders of Granite State Common Stock
will not be entitled to appraisal rights under New Hampshire law in connection
with the matters to be acted upon at the Granite State Special Meeting.
Each Primary Bank stockholder who objects to the Merger shall be entitled
to the rights and remedies of dissenting stockholders provided under New
Hampshire law. To obtain rights as a dissenter, holders of Primary Bank Common
Stock must comply with certain procedural requirements under New Hampshire law.
The shares held by a Primary Bank stockholder who has lost his or her
dissenters' rights by failing to comply with the statutory procedures will be
converted into shares of Granite State Common Stock and cash in lieu of any
fractional share as though such stockholder had assented to the Merger. See
"THE MERGER--Rights of Dissenting Stockholders."
Accounting Treatment and Certain Federal Income Tax Consequences. The
Merger is intended to qualify as a "pooling of interests" for financial
accounting purposes and is expected to constitute a tax-free reorganization for
federal income tax purposes. See "THE MERGER--Certain Federal Income Tax
Consequences" and "--Accounting Treatment."
Recommendations of the Board of Directors of Granite State and Primary
Bank. The Board of Directors of Granite State unanimously recommends that its
stockholders approve and adopt the Agreement. The Board of Directors of Primary
Bank unanimously recommends that its stockholders approve and adopt the
Agreement. See "THE MERGER--Recommendation of the Boards of Directors," and
"THE MERGER--Reasons for the Merger" for a discussion of the reasons why the
Boards of Directors believe that the Merger is in the best interests of their
respective stockholders.
Opinions of Financial Advisors. Friedman, Billings, Ramsey & Co. ("FBR")
has delivered its written opinion to the Board of Directors of Granite State
that, as of August 8, 1997, the Merger is fair from a financial point of view
to the stockholders of Granite State. Northeast Capital and Advisory, Inc.
("Northeast Capital") has delivered its written opinion to the Board of
Directors of Primary Bank that, as of August 8, 1997, the Exchange Ratio to be
received by stockholders of Primary Bank pursuant to the Agreement is fair,
from a financial point of view, to such stockholders. For information on the
assumptions made, matters considered, and limitations on the review undertaken
by the financial advisors, see "THE MERGER--Opinion of Financial Advisor to
Granite State" and "--Opinion of Financial Advisor to Primary Bank."
Stockholders of
<PAGE> 6
Granite State and Primary Bank are urged to read in entirety the opinions of
FBR and Northeast Capital, attached as APPENDICES B AND C, respectively, to
this Joint Proxy Statement.
Conditions to the Merger; Regulatory Approvals. The obligations of
Granite and Primary to complete the Merger are subject to various conditions
usual and customary in transactions similar to the Merger, including obtaining
requisite regulatory approvals and stockholder approval. Application has been
made to obtain required regulatory approvals. No assurance can be given that
all required approvals will be received or as to the timing or conditions of
such approvals. See "THE MERGER--Regulatory and Other Approvals." The
obligation of Granite to complete the Merger is also subject to certain other
conditions, including, among other things, receipt of an opinion from Granite
State's independent auditors to the effect that the Merger will be treated as a
"pooling of interests" for financial accounting purposes. No assurances can be
given that all such conditions will be met. See "THE MERGER--Conditions to the
Merger."
Termination; Effect of Termination. The Agreement may be terminated on or
at any time prior to the Closing Date (as defined below) by the mutual written
consent of the parties to the Agreement. The Closing Date shall be determined
by Granite State, in its sole discretion, upon five days prior written notice
to Primary Bank, but in no event later than thirty days after the last
condition precedent pursuant to the Agreement has been fulfilled or waived, or
such other date as Granite State and Primary Bank shall agree. In addition, the
Agreement may be terminated by Granite State or Primary Bank in certain
circumstances including, among others, generally: (i) certain breaches of
representations, warranties, covenants or other obligations; (ii) if the
Closing Date has not occurred on or before February 28, 1998; (iii) if either
party is notified that a necessary regulatory approval is unlikely to be
granted; or (iv) if stockholder approval is not obtained. In addition, Primary
Bank may terminate the Agreement if on the Closing Date the Granite State
Trading Price is less than $13.533 or if it enters into an agreement relating
to any bona fide proposal or offer with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of all or any
substantial part of the assets or any equity securities of, Primary Bank, the
terms of which the Primary Bank Board of Directors determines in good faith
after receiving the advice of Primary Bank's counsel and financial advisor to
be more favorable to Primary Bank's stockholders than the Merger (a "Superior
Acquisition Proposal"). See "THE MERGER--Termination; Effect of Termination."
Exchange of Certificates. After the Effective Date, Granite State will
send to former Primary Bank stockholders transmittal materials for use in
effecting the exchange of their certificates representing shares of Primary
Bank Common Stock for certificates representing shares of Granite State Common
Stock. See "THE MERGER--Exchange of Primary Bank Stock Certificates."
DIFFERENCES IN STOCKHOLDER RIGHTS
Granite State is a New Hampshire corporation. Primary Bank is a New
Hampshire-chartered guaranty (stock) savings bank. Under New Hampshire law, the
rights of holders of Granite State Common Stock and Primary Bank Common Stock
are generally governed, directly or indirectly, by the New Hampshire Business
Corporation Act, and in the case of Primary Bank's stockholders, by New
Hampshire banking law. The rights of holders of Granite State Common Stock are
also governed by Granite State's Articles of Incorporation ("Granite State
Articles") and Bylaws, and the rights of holders of Primary Bank Common Stock
are also governed by Primary Bank's Articles of Agreement ("Primary Bank
Articles") and Bylaws. Upon completion of the Merger, stockholders of Primary
Bank will become stockholders of Granite State whose rights will be governed by
Granite State's Articles of Incorporation and Bylaws. The rights of
stockholders of Granite State are different in certain respects from the rights
of stockholders of Primary Bank. See "COMPARISON OF STOCKHOLDER RIGHTS."
<PAGE> 7
MANAGEMENT AND OPERATIONS AFTER THE MERGER
On the Effective Date, Mr. Christopher J. Flynn, if he is the President
and Chief Executive Officer of Primary Bank at such time, shall become the
President of Granite Bank, and Mr. Charles P. Monaghan, if he is a Senior Vice
President of Primary Bank at such time, shall become a Senior Vice President of
Granite Bank. Those persons serving as directors of Granite Bank immediately
prior to the Effective Date will continue to serve as directors together with
four directors to be designated by Primary Bank (one of whom shall be Mr.
Flynn) subject to Granite Bank's and Granite State's approval, and those
persons serving as directors of Granite State immediately prior to the
Effective Date will continue to serve as directors together with three
directors to be designated by Primary Bank (one of whom shall be Mr. Flynn)
subject to Granite State's approval. See "THE MERGER--Management and Operations
After the Merger."
CERTAIN RELATED TRANSACTIONS
Stock Option Agreement. As a condition to entering into the Agreement,
Primary Bank granted Granite State an option to purchase under certain
circumstances up to 269,464 shares, or approximately 12.9%, of the issued and
outstanding shares of Primary Bank Common Stock pursuant to the Stock Option
Agreement, dated as of April 29, 1997 (the "Stock Option Agreement"). The
option may be exercised by Granite State only upon the occurrence of specified
events that have the potential for a third party to effect an acquisition of
control of Primary Bank prior to the termination of the Agreement. The exercise
price per share to purchase Primary Bank Common Stock under the option is equal
to $22.75, subject to adjustment and limitations in certain circumstances.
Acquisitions of shares of Primary Bank Common Stock pursuant to an exercise of
the option would be subject to prior regulatory approval under certain
circumstances. In addition, the Stock Option Agreement grants to Granite State,
upon the occurrence of a "Repurchase Event," the right to require Primary Bank
to repurchase for cash the option and any shares that may have been acquired
thereunder. See "CERTAIN RELATED TRANSACTIONS--Stock Option Agreement."
The Stock Option Agreement, together with Primary Bank's agreement to not
solicit other transactions relating to the acquisition of Primary Bank by a
third party and the letter agreements executed by each of Primary Bank
directors and senior executive officers pursuant to which each agreed to vote
their shares in favor of the Agreement (the "Affiliate Agreements"), may have
the effect of discouraging persons who might be interested in acquiring Primary
Bank from considering or proposing such an acquisition, even if such persons
were prepared to pay a higher price per share for Primary Bank Common Stock
than the price per share implicit in the Merger. See "THE MERGER--Matters to be
Considered at the Meeting and "--No Solicitation of Bids."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of Primary Bank are the holders
of stock options to acquire Primary Bank Common Stock which in connection with
the Merger will be converted into options to acquire Granite State Common Stock
under substantially the same terms, adjusted for the Exchange Ratio. Primary
Bank officers Christopher J. Flynn and Charles P. Monaghan will be offered
employment contracts with Granite State, and Mr. Flynn will be offered
incentive stock options to purchase 5,000 shares of Granite State Common Stock.
Also, Granite has agreed to indemnify, for a period of six years after the
Effective Date, persons who served as directors and officers of Primary Bank.
See "THE MERGER--Management and Operations After the Merger" and "INTERESTS OF
CERTAIN PERSONS IN THE MERGER."
<PAGE> 8
COMPARATIVE PER COMMON SHARE DATA
The following table sets forth certain unaudited comparative per share
data relating to book value per common share, cash dividends declared per
common share and income from continuing operations per common share (i) on an
historical basis for Granite State and Primary Bank, (ii) on a pro forma basis
per share of Granite State Common Stock to reflect completion of the Merger,
and (iii) on an equivalent pro forma basis per share of Primary Bank Common
Stock to reflect completion of the Merger. The information for Granite State
has been adjusted to reflect the three-for-two stock split declared in the form
of a stock dividend and paid to Granite State stockholders on May 9, 1997. The
pro forma information has been prepared giving effect to the Merger using the
"pooling of interests" accounting method. For a description of the effect of
"pooling of interests" accounting, see "THE MERGER--Accounting Treatment." The
following equivalent per share data assumes an Exchange Ratio of 1.3161 shares
of Granite State Common Stock for each share of Primary Bank Common Stock
(based on a closing sale price of $20.625 per share for Granite State Common
Stock as of July 30, 1997); the Exchange Ratio is subject to adjustment based
on the Granite State Trading Price as of the Effective Date. See "THE
MERGER--Terms of the Merger." The following pro forma information does not give
effect to any potential cost savings or any Merger-related expenses which may
be realized or incurred as a result of the Merger. This information should be
read in conjunction with the consolidated financial statements of Granite State
and the financial statements of Primary Bank, including the notes thereto,
incorporated by reference in this Joint Proxy Statement, and the other
financial data appearing elsewhere in this Joint Proxy Statement. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION."
The following information is not necessarily indicative of the results of
operations of future periods or future combined financial position:
<TABLE>
<CAPTION>
AT MARCH 31, 1997 AT DECEMBER 31, 1996
----------------- --------------------
<S> <C> <C>
BOOK VALUE PER COMMON SHARE
Historical:
Granite State.................................... $ 10.69 $ 10.54
Primary Bank..................................... 13.82 13.49
Pro Forma <F1>:
Pro forma per share of Granite State Common
Stock........................................... 10.60 10.40
Equivalent pro forma per share of Primary
Bank Common Stock............................... 13.95 13.69
</TABLE>
(footnotes on following page)
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
FOR THE THREE MONTHS ------------------------------
ENDED MARCH 31, 1997 1996 1995 1994
-------------------- ---------- -------- ------
<S> <C> <C> <C> <C>
CASH DIVIDENDS PER COMMON SHARE
Historical:
Granite State.................................... $ 0.11 $ 0.37 $ 0.32 $ 0.24
Primary Bank..................................... -- -- -- --
Pro Forma <F2>:
Pro forma per share of Granite State Common
Stock........................................... $ 0.11 $ 0.37 $ 0.32 $ 0.24
Equivalent pro forma per share of Primary Bank
Common Stock.................................... $ 0.14 $ 0.49 $ 0.42 $ 0.32
EARNINGS (LOSS) FROM CONTINUING OPERATIONS PER
COMMON SHARE
Historical:
Granite State.................................... $ 0.63 $ 1.19 $ 1.05 $ 0.84
Primary Bank..................................... $ 0.40 $ 1.63<F4> $ (0.46) $ 1.10
Pro Forma <F3>:
Pro forma per share of Granite State Common
Stock........................................... $ 0.47 $ 1.21<F5> $ 0.41 $ 0.84
Equivalent pro forma per share of Primary Bank
Common Stock.................................... $ 0.62 $ 1.59<F6> $ 0.54 $ 1.11
<FN>
- --------------------
<F1> Granite State pro forma book value per common share represents historical
book value for Granite State and Primary Bank combined on the assumption
that Granite State and Primary Bank had been combined for the periods
presented on a "pooling of interests" basis, divided by the number of
shares of Granite State Common Stock which will be issued and outstanding
following completion of the Merger. Primary Bank equivalent pro forma
book value per common share represents such amounts multiplied by an
Exchange Ratio of 1.3161 shares of Granite State Common Stock for each
share of Primary Bank Common Stock. The Exchange Ratio is subject to
adjustment based on the Granite State Trading Price. See "THE
MERGER--Terms of the Merger."
<F2> Granite State pro forma dividends per share represent historical
dividends paid by Granite State, and Primary Bank pro forma equivalent
dividends per share represent such amounts multiplied by an Exchange
Ratio of 1.3161 shares of Granite State Common Stock for each share of
Primary Bank Common Stock. The Exchange Ratio is subject to adjustment
based on the Granite State Trading Price. See "THE MERGER--Terms of the
Merger."
<F3> Granite State pro forma earnings from continuing operations per common
share represents historical net earnings (loss) from continuing
operations for Granite State and Primary Bank combined on the assumption
that Granite State and Primary Bank had been combined for the periods
presented on a "pooling of interests" basis, divided by the number of
shares of Granite State Common Stock which will be issued and outstanding
following completion of the Merger. Primary Bank equivalent pro forma
earnings from continuing operations per common share represents such
amounts multiplied by an Exchange Ratio of 1.3161 shares of Granite State
Common Stock for each share of Primary Bank Common Stock. The Exchange
Ratio is subject to adjustment based on the Granite State Trading Price.
See "THE MERGER--Terms of the Merger." Except as noted, primary and fully
diluted information is equivalent.
<F4> Represents primary earnings per share. Fully-diluted earnings per share
were $1.59.
<F5> Represents primary earnings per share. Fully-diluted earnings per share
were $1.20.
<F6> Represents primary earnings per share. Fully-diluted earnings per share
were $1.58.
</FN>
</TABLE>
<PAGE> 10
Market Value of Securities. The last reported sale price of Granite State
Common Stock and Primary Bank Common Stock on April 29, 1997, the last trading
day prior to the announcement of the proposed Merger on the evening of April
29, was at a price of $16.958 (as adjusted) and $22.688, respectively. The
equivalent market value per share of Primary Bank Common Stock, based upon an
Exchange Ratio of 1.4926 shares of Granite State Common Stock for each
outstanding share of Primary Bank Common Stock, would be $25.31. See "THE
MERGER--Terms of the Merger."
Market Price and Dividend Information. On July 30, 1997, the last
reported sale price of Granite State Common Stock, as reported on the Nasdaq
National Market, was $20.625 per share. The equivalent market value per share
of Primary Bank Common Stock, based upon an Exchange Ratio of 1.3161 shares of
Granite State Common Stock for each outstanding share of Primary Bank Common
Stock, would be $27.144. The Exchange Ratio is subject to adjustment based on
the Granite State Trading Price as of the Effective Date. See "THE
MERGER--Terms of the Merger." On July 30, 1997, the last reported sale price of
Primary Bank Common Stock, as reported on the Nasdaq National Market, was
$25.50 per share. For information concerning cash dividends paid by Granite
State, see "INFORMATION WITH RESPECT TO GRANITE STATE--Market Price of and
Dividends on Granite State Common Stock and Related Stockholder Matters."
<PAGE> 11
GRANITE STATE SELECTED FINANCIAL DATA
The following table sets forth certain historical consolidated summary
financial data for Granite State. This data is derived from, and should be
read in conjunction with, among other things, the consolidated financial
statements of Granite State, including the notes thereto, incorporated by
reference in this Joint Proxy Statement. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "AVAIL-ABLE INFORMATION." Interim unaudited data
at March 31, 1997, and for the three months ended March 31, 1997 and 1996
reflects, in the opinion of the management of Granite State, all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the three months ended March 31,
1997, are not necessarily indicative of results which may be expected for
any other interim period or for the year as a whole.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $377,328 $370,433 $346,414 $310,840 $301,996 $304,879
Net loans 205,955 200,803 184,309 187,427 181,318 169,674
Loans held for sale 319 1,025 1,985 664 423 2,325
Investments <F1> 120,720 112,138 98,231 91,746 76,888 76,430
Deposits 317,598 304,154 287,130 240,029 261,372 270,105
Securities sold under agreements to repurchase 23,296 31,535 26,189 21,968 13,764 10,500
Short-term borrowings from the Federal Home Loan
Bank of Boston -- -- -- 20,904 -- --
Long-term debt 681 691 728 328 150 236
Stockholders' equity 32,372 31,296 29,789 25,641 25,381 23,180
<CAPTION>
FOR THREE
MONTHS ENDED
MARCH 31, FOR YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and dividend income $ 6,592 $ 6,278 $25,550 $24,582 $20,344 $18,783 $22,599
Interest expense 3,132 2,918 11,842 10,973 7,704 7,919 12,064
-------------------------------------------------------------------
Net interest and dividend income 3,460 3,360 13,708 13,609 12,640 10,864 10,535
Provision for possible loan losses 75 225 650 735 600 637 752
Net gains on securities 2,056 189 687 326 195 327 1,616
Other noninterest income 536 662 2,494 2,189 2,002 2,818 3,297
Noninterest expense 2,846 2,627 10,514 10,081 10,162 10,494 12,503
-------------------------------------------------------------------
Earnings before income taxes and cumulative effect
of change in accounting principle 3,131 1,359 5,725 5,308 4,075 2,878 2,193
Applicable income taxes 1,173 478 1,945 1,873 1,252 956 674
-------------------------------------------------------------------
Earnings before cumulative effect of change in
accounting principle 1,958 881 3,780 3,435 2,823 1,922 1,519
Cumulative effect of change in accounting principle -- -- -- -- -- 205 --
-------------------------------------------------------------------
Net earnings $ 1,958 $ 881 $ 3,780 $ 3,435 $ 2,823 $ 2,127 $ 1,519
===================================================================
Preferred stock dividends -- -- -- -- -- $ 228 $ 306
Net earnings applicable to common stock $ 1,958 $ 881 $ 3,780 $ 3,435 $ 2,823 $ 1,899 $ 1,213
PER SHARE DATA: <F2>
Net earnings per common share--primary:
Before cumulative effect of change in accounting
principle $ 0.63 $ 0.27 $ 1.19 $ 1.05 $ 0.84 $ 0.59 $ 0.47
Cumulative effect of change in accounting principle -- -- -- -- -- 0.07 --
-------------------------------------------------------------------
$ 0.63 $ 0.27 $ 1.19 $ 1.05 $ 0.84 $ 0.66 $ 0.47
===================================================================
Net earnings per common share--fully diluted:
Before cumulative effect of change in
accounting principle $ 0.63 $ 0.27 $ 1.19 $ 1.05 $ 0.84 $ 0.57 $ 0.47
Cumulative effect of a change in accounting principle -- -- -- -- -- 0.06 --
-------------------------------------------------------------------
$ 0.63 $ 0.27 $ 1.19 $ 1.05 $ 0.84 $ 0.63 $ 0.47
===================================================================
Cash dividends declared on common stock $ 0.11 $ 0.09 $ 0.37 $ 0.32 $ 0.24 $ 0.05 $ 0.00
===================================================================
FINANCIAL RATIOS <F3>:
Return on average assets 2.15% 1.03% 1.07% 1.05% 0.91% 0.71% 0.48%
Return on average stockholders' equity 24.76% 11.43% 12.46% 12.23% 10.73% 8.76% 6.81%
<FN>
- --------------------
<F1> Investments include securities held to maturity, securities available
for sale, trading securities, investment securities, investments held
for sale and stock in the Federal Home Loan Bank of Boston.
<F2> As adjusted to reflect Granite State's May 9, 1997 three-for-two stock
split.
<F3> Financial ratios are based on net earnings.
</FN>
</TABLE>
<PAGE> 12
PRIMARY BANK SELECTED FINANCIAL DATA
The following table sets forth certain selected historical
consolidated financial data for Primary. These data are derived in part
from, and should be read in conjunction with, among other things, the
consolidated financial statements of Primary Bank, including the related
notes thereto, incorporated by reference in this Joint Proxy Statement. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE
INFORMATION."
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $435,716 $427,407 $382,310 $357,470 $333,747 $328,219
Investment securities 159,951 158,363 118,424 112,500 89,232 79,688
Total loans, net 240,068 232,960 229,901 210,925 212,508 212,756
Allowance for loan losses 2,481 2,577 3,447 2,850 2,946 3,206
Other real estate owned, net 1,846 1,980 2,088 4,455 5,340 7,224
Deposits 308,207 305,090 303,632 279,736 255,614 291,744
Borrowings 96,236 91,925 51,540 52,056 53,260 21,114
Stockholders' Equity
(Retained Earnings) 28,843 28,133 24,966 22,995 23,032 13,405
<CAPTION>
FOR THREE
MONTHS ENDED
MARCH 31, FOR YEAR ENDED DECEMBER 31,
----------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and dividend income $ 7,690 $ 6,986 $28,880 $27,216 $23,239 $20,757 $23,916
Interest expense 4,031 3,724 15,401 14,045 11,017 10,744 14,304
-------------------------------------------------------------------
Net interest and dividend income
before provision for loan losses 3,659 3,262 13,479 13,171 12,222 10,013 9,612
Provision for loan losses 150 54 722 2,602 432 1,188 2,523
-------------------------------------------------------------------
Net interest and dividend income
after provision for loan losses 3,509 3,208 12,757 10,569 11,790 8,825 7,089
Non-interest income 651 529 2,550 2,526 2,237 2,825 3,707
Operating expense 3,281 2,950 12,126 14,283 12,471 11,158 13,764
-------------------------------------------------------------------
Income (loss) before income taxes $ 879 $ 787 $ 3,181 $(1,188) $ 1,556 $ 492 $(2,968)
Income tax expense (benefit) -- -- (240) (235) (690) (435) --
-------------------------------------------------------------------
Net income (loss) $ 879 $ 787 $ 3,421 $ (953) $ 2,246 $ 927 $(2,968)
===================================================================
PER SHARE DATA: <F1>
Earnings (loss) per common and
common equivalent share <F2> $ .40 $ .37 $ 1.59 $ (.46) $ 1.10 N/A N/A
===================================================================
<FN>
- --------------------
<F1> Primary Bank has never declared or paid a cash dividend.
<F2> Fully-diluted. Primary earnings per share were equivalent except that
for the three months ended March 31, 1996, and the year ended December
31, 1996, primary earnings per share were $.38 and $1.63,
respectively. Per share information is not reported for the fiscal
years ended December 31, 1993 and 1992 because Primary Bank was not a
public company until October 13, 1993.
</FN>
</TABLE>
<PAGE> 13
PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables set forth selected unaudited condensed pro forma
financial data giving effect to the Merger. The pro forma balance sheet has
been prepared as if the Merger were consummated on March 31, 1997, and the
pro forma income statements have been prepared as if the Merger were
consummated as of the beginning of the periods presented. The pro forma
information has been prepared assuming that Primary Bank stockholders
received in the Merger 1.3161 shares of Granite State Common Stock for each
share of Primary Bank Common Stock they own (based on a closing sale price
of $20.625 per share of Granite State Common Stock as of July 30, 1997).
This Exchange Ratio is subject to adjustment based on the Granite State
Trading Price. See "THE MERGER--Terms of the Merger." The pro forma
financial information included in this Joint Proxy Statement is presented
for illustrative purposes only. Such pro forma financial information does
not necessarily reflect what the actual results of Granite State would be
following completion of the Merger.
The following pro forma information does not give effect to any
potential cost savings, expenses or non-recurring charges which may be
realized or incurred as a result of the Merger. The information presented
herein has been adjusted to reflect the Granite State three-for-two stock
split declared in the form of a stock dividend and paid to Granite State
stockholders on May 9, 1997. See "THE MERGER--Management and Operations
After the Merger."
<PAGE> 14
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1997
The following unaudited pro forma combined condensed balance sheet
information reflects (i) the historical consolidated balance sheets of
Granite State and Primary Bank as of March 31, 1997 and (ii) the pro forma
combined condensed balance sheet of Granite State as of such date, after
giving effect to the Merger. The Merger has been reflected as a "pooling of
interests" effective as of March 31, 1997. The unaudited information should
be read in conjunction with the historical consolidated financial statements
of Granite State and Primary Bank, including the notes thereto, incorporated
by reference in this Joint Proxy Statement. See "SUMMARY--Comparative Per
Common Share Data" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
<TABLE>
<CAPTION>
GRANITE STATE
GRANITE AND PRIMARY
STATE PRIMARY BANK BANK COMBINED
------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents, and amounts due
from depository institutions $ 17,803 $ 11,462 $ 29,265
Interest bearing deposits--Federal Home Loan Bank
of Boston 12,384 -- 12,384
Securities held to maturity 15,500 54,666 70,166
Mortgage-backed securities held to maturity -- 15,213 15,213
Securities available for sale 102,005 90,072 192,077
Stock In Federal Home Loan Bank of Boston 3,215 3,537 6,752
Loans held for sale 319 -- 319
Loans 209,673 242,549 452,222
Allowance for possible loan losses (3,718) (2,481) (6,199)
-----------------------------------
Net loans 205,955 240,068 446,023
Other assets 20,147 20,698 40,845
-----------------------------------
Total assets $377,328 $435,716 $813,044
===================================
LIABILITIES:
Deposits $317,598 $308,207 $625,805
Securities sold under agreements to repurchase 23,296 27,552 50,848
Borrowings 681 68,684 69,365
Other Liabilities 3,381 2,430 5,811
-----------------------------------
Total liabilities 344,956 406,873 751,829
-----------------------------------
STOCKHOLDERS EQUITY:
Common Stock 3,949 21 6,696<F1>
Additional paid-in capital 18,524 16,172 31,970<F1>
Unrealized gain (loss) on securities available for sale,
net of related tax effects 1,392 (597) 795
Retained Earnings 14,811 13,390 28,201
Less: Treasury stock (6,304) -- (6,304)
Less: Unearned compensation-ESOP -- (143) (143)
-----------------------------------
Total stockholders' equity 32,372 28,843 61,215
-----------------------------------
Total liabilities and stockholders' equity $377,328 $435,716 $813,044
===================================
<FN>
- --------------------
<F1> As adjusted due to the Exchange Ratio and the difference in par value
of shares of Primary Bank Common Stock and Granite State Common Stock.
</FN>
</TABLE>
<PAGE> 15
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF INCOME
The following unaudited pro forma combined condensed statements of
income reflect the historical consolidated statements of income of Granite
State and Primary Bank, as indicated below, for each period presented and
the pro forma combined condensed statements of income of Granite State,
after giving effect to the Merger. The Merger has been reflected as a
"pooling of interests." See "THE MERGER--Accounting Treatment." The pro
forma combined condensed statements of income for the three-month periods
ended March 31, 1997 and 1996 and the years ended December 31, 1996, 1995
and 1994 were prepared on the assumption that the Merger had been effected
as of the beginning of the applicable three-month or annual period. The
unaudited information should be read in conjunction with the historical
consolidated financial statements of Granite State and Primary Bank,
including the notes thereto, incorporated by reference in the Joint Proxy
Statement. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
Pro Forma Unaudited Combined Condensed Statements of Income for the
Three Months Ended March 31, 1997.
<TABLE>
<CAPTION>
GRANITE
STATE
GRANITE AND PRIMARY
STATE PRIMARY BANK BANK COMBINED
------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income $ 6,592 $ 7,690 $14,282
Interest expense 3,132 4,031 7,163
Net interest income 3,460 3,659 7,119
Provision for possible loan losses 75 150 225
Net interest income after provision for possible
loan losses 3,385 3,509 6,894
Non-interest income 2,592 651 3,243
Non-interest expense 2,846 3,281 6,127
Earnings before income tax expense 3,131 879 4,010
Income tax expense 1,173 -- 1,173
Net earnings 1,958 879 2,837
Earnings per share (primary) 0.63 0.40 0.47
Earnings per share (fully diluted) 0.63 0.40 0.47
</TABLE>
<PAGE> 16
Pro Forma Unaudited Combined Condensed Statements of Income for the
Three Months Ended March 31, 1996.
<TABLE>
<CAPTION>
GRANITE
STATE
GRANITE AND PRIMARY
STATE PRIMARY BANK BANK COMBINED
------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income $ 6,278 $ 6,986 $13,264
Interest expense 2,918 3,724 6,642
Net interest income 3,360 3,262 6,622
Provision for possible loan losses 225 54 279
Net interest income after provision for possible
loan losses 3,135 3,208 6,343
Non-interest income 851 529 1,380
Non-interest expense 2,627 2,950 5,577
Earnings before income tax expense 1,359 787 2,146
Income tax expense 478 -- 478
Net earnings 881 787 1,668
Earnings per share (primary) 0.27 0.38 0.28
Earnings per share (fully diluted) 0.27 0.37 0.28
</TABLE>
Pro Forma Unaudited Combined Condensed Statements of Income for the
Year Ended December 31, 1996.
<TABLE>
<CAPTION>
GRANITE
STATE
GRANITE AND PRIMARY
STATE PRIMARY BANK BANK COMBINED
------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income $25,550 $28,880 $54,430
Interest expense 11,842 15,401 27,243
Net interest income 13,708 13,479 27,187
Provision for possible loan losses 650 722 1,372
Net interest income after provision for possible
loan losses 13,058 12,757 25,815
Non-interest income 3,181 2,550 5,731
Non-interest expense 10,514 12,126 22,640
Earnings before income tax expense (benefit) 5,725 3,181 8,906
Income tax expense (benefit) 1,945 (240) 1,705
Net earnings 3,780 3,421 7,201
Earnings per share (primary) 1.19 1.63 1.21
Earnings per share (fully diluted) 1.19 1.59 1.20
</TABLE>
<PAGE> 17
Pro Forma Unaudited Combined Condensed Statements of Income for the
Year Ended December 31, 1995.
<TABLE>
<CAPTION>
GRANITE
STATE
GRANITE AND PRIMARY
STATE PRIMARY BANK BANK COMBINED
------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income $24,582 $27,216 $51,798
Interest expense 10,973 14,045 25,018
Net interest income 13,609 13,171 26,780
Provision for possible loan losses 735 2,602 3,337
Net interest income after provision for possible
loan losses 12,874 10,569 23,443
Non-interest income 2,515 2,526 5,041
Non-interest expense 10,081 14,283 24,364
Earnings (loss) before income tax expense (benefit) 5,308 (1,188) 4,120
Income tax expense (benefit) 1,873 (235) 1,638
Net earnings (loss) 3,435 (953) 2,482
Earnings (loss) per share (primary) 1.05 (0.46) 0.41
Earnings (loss) per share (fully diluted) 1.05 (0.46) 0.41
</TABLE>
Pro Forma Unaudited Combined Condensed Statements of Income for the
Year Ended December 31, 1994.
<TABLE>
<CAPTION>
GRANITE
STATE
GRANITE AND PRIMARY
STATE PRIMARY BANK BANK COMBINED
------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income $20,344 $23,239 $43,583
Interest expense 7,704 11,017 18,721
Net interest income 12,640 12,222 24,862
Provision for possible loan losses 600 432 1,032
Net interest income after provision for possible
loan losses 12,040 11,790 23,830
Non-interest income 2,197 2,237 4,434
Non-interest expense 10,162 12,471 22,633
Earnings before income tax expense (benefit) 4,075 1,556 5,631
Income tax expense (benefit) 1,252 (690) 562
Net earnings 2,823 2,246 5,069
Earnings per share (primary) 0.84 1.10 0.84
Earnings per share (fully diluted) 0.84 1.10 0.84
</TABLE>
<PAGE> 18
GRANITE STATE AND GRANITE BANK
GRANITE STATE
Granite State, a New Hampshire Corporation, is the holding company for
Granite Bank, a New Hampshire-chartered commercial bank headquartered in Keene,
New Hampshire. Granite State is a single-bank holding company formed in 1986 to
acquire all of the stock of Granite Bank upon Granite Bank's conversion from a
mutual savings bank to a state-chartered guaranty (stock) savings bank. Since
that time Granite State 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 merged into Granite Bank. As of March 31,
1997, Granite State had total consolidated assets of $377.3 million, deposits
of $317.6 million and stockholders' equity of $32.4 million. The executive
offices of Granite State are located at 122 West Street, Keene, New Hampshire
03431, and the telephone number is (603) 352-1600.
GRANITE BANK
Granite Bank, which was chartered in 1895 as a New Hampshire mutual
savings bank, converted to the capital stock form of organization in 1986, and
converted to a state-chartered commercial bank in 1991. Granite Bank is a
member of the Federal Home Loan Bank System and its deposit accounts are
insured to the maximum allowable amount by the FDIC. Granite Bank is regulated
by the New Hampshire Bank Commissioner and the FDIC, and is further regulated
by the Board of Governors of the Federal Reserve System as to reserves required
to be maintained against deposits and certain other matters.
Granite Bank has been and continues to be a community-oriented commercial
bank offering a variety of financial services. The principal business of
Granite Bank consists of attracting deposits from the general public and
underwriting loans secured by residential and commercial real estate and other
loans. Granite Bank also originates fixed-rate residential real estate loans
for sale in the secondary mortgage market. Granite Bank has nine full-service
offices and an additional 13 remote automatic teller machines and serves
Cheshire, Hillsborough, Strafford and Rockingham counties, New Hampshire. In
addition, Granite Bank has filed an application with the Banking Department of
the State of New Hampshire, seeking permission to open a full-service office in
Nashua, New Hampshire.
The executive offices of Granite Bank are located at 122 West Street,
Keene, New Hampshire 03431, and the telephone number is (603) 352-1600. See
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"GRANITE STATE SELECTED FINANCIAL DATA," "INFORMATION WITH RESPECT TO GRANITE
STATE," AND "DESCRIPTION OF GRANITE STATE COMMON STOCK."
PRIMARY BANK
Primary Bank is a New Hampshire-chartered guaranty (stock) savings bank
headquartered in Peterborough, New Hampshire. As of March 31, 1997, Primary
Bank had total assets of $435.7 million, deposits of $308.2 million and
stockholders' equity of $28.8 million. Primary Bank is a community-oriented
savings bank offering a variety of financial services, with a focus on the
state's middle-market business community. The principal business of Primary
Bank consists of attracting deposits from the general public, with a focus on
consumer demand deposit accounts, and underwriting loans secured by residential
and commercial real estate and other loans. Primary Bank operates ten
full-service offices and five free-standing automatic teller machines serving
Cheshire, Hillsborough and Merrimack counties, New Hampshire.
<PAGE> 19
The executive offices of Primary Bank are located at 35 Main Street,
Peterborough, New Hampshire 03458, and the telephone number is (603) 924-7142.
See "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"PRIMARY BANK SELECTED FINANCIAL DATA," and "INFORMATION WITH RESPECT TO
PRIMARY BANK."
THE SPECIAL MEETINGS
THE GRANITE STATE SPECIAL MEETING
Meeting Date, Time and Place. The Granite State Special Meeting will be
held at The Keene Country Club, West Hill Road, Keene, New Hampshire, on
Tuesday, September 23, 1997 at 10:00 a.m., local time. This Joint Proxy
Statement is being sent to holders of record, and certain beneficial owners, of
Granite State Common Stock as of the Granite State Record Date and is
accompanied by a Proxy Card which the Granite State Board requests that
stockholders execute and return to Granite State for use at the Granite State
Special Meeting and at any and all adjournments or postponements thereof.
Granite State Record Date. The record date for the Granite State Special
Meeting is July 30, 1997 (the "Granite State Record Date"). Only holders of
record of Granite State Common Stock at the close of business on the Granite
State Record Date will be entitled to receive notice of, and to vote at, the
Granite State Special Meeting.
Matters to be Considered. At the Granite State Special Meeting, holders
of Granite State Common Stock will consider and vote upon the approval of the
Agreement and the transactions contemplated thereby, including the Merger and
the issuance by Granite State of shares of Granite State Common Stock in
exchange for the outstanding shares of Primary Bank Common Stock in accordance
with the terms of the Agreement, and the payment of cash in lieu of any
fractional share. Granite State stockholders may also consider and vote upon
such other matters as are properly brought before the Granite State Special
Meeting, including proposals to adjourn the Granite State Special Meeting to
permit the further solicitation of proxies by Granite State's Board of
Directors in the event that there are not sufficient votes to approve any
proposal at the time of the Granite State Special Meeting; provided, however,
that any proxy which is voted against approval of the Agreement will not be
voted in favor of adjournment to solicit further proxies for such proposal.
Vote Required. New Hampshire law requires that the Merger be approved by
Granite Bank's stockholders. Granite State, which owns 100% of Granite Bank's
common stock, will vote to approve the Merger. Although neither applicable New
Hampshire law nor the Articles of Incorporation of Granite State requires the
stockholders of Granite State to approve the Agreement, the rules and
regulations of the Nasdaq National Market require that the issuance of shares
of Granite State Common Stock in connection with the Merger be approved by the
affirmative vote of the holders of a majority of the shares cast by the holders
of Granite State Common Stock eligible to vote. Moreover, to permit greater
shareholder participation in the strategic direction of Granite State, Granite
State's Board of Directors has determined to permit Granite State stockholders
to vote on the approval of the Agreement pursuant to which the shares of
Granite State Common Stock will be issued, and will require that the Agreement
be approved by the affirmative vote of the holders of a majority of the shares
cast by the holders of Granite State Common Stock eligible to vote. However,
under New Hampshire law, Granite State stockholders will not have dissenters'
rights as a result of the Board's decision to permit them to vote on the
Agreement.
As of the Granite State Record Date there were approximately 759 record
holders of outstanding Granite State Common Stock and 3,028,437 shares of
Granite State Common Stock entitled to vote at the Granite State Special
Meeting. Shares represented by all properly executed proxies received prior to
the Granite State Special Meeting and not revoked prior to exercise will be
voted in the manner specified by the
<PAGE> 20
holder thereof. Executed proxies which do not contain voting instructions will
be voted in favor of approval and adoption of the Agreement. Abstentions may be
specified on the Proxy Card. Nonvoting shares, abstentions and broker non-votes
will not be counted as votes cast for purposes of determining whether a
majority has been attained and therefore will have no effect on the vote to
approve the Agreement.
It is not expected that any matter, other than those referred to herein,
will be brought before the Granite State Special Meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with their judgment with respect to such matters.
The presence, in person or by proxy, of at least a majority of the shares
of Granite State Common Stock entitled to vote is necessary to constitute a
quorum at the Granite State Special Meeting. Granite State intends to count
non-voting shares, abstentions and broker non-votes as present at the Granite
State Special Meeting for purposes of determining the presence or absence of a
quorum for the transaction of business. With a quorum, or in the absence of
such, the affirmative vote of a majority of shares of Granite State Common
Stock represented at the Granite State Special Meeting may authorize the
adjournment of the meeting.
Proxies. Any proxy given pursuant to this solicitation or otherwise may
be revoked by the person giving it at any time before it is voted either by
delivering to the Secretary of Granite State at 122 West Street, Keene, New
Hampshire 03431 on or before the taking of the vote at the Granite State
Special Meeting, a written notice of revocation bearing a later date than the
date of the proxy or a later dated proxy relating to the same shares, or by
attending the Granite State Special Meeting and voting in person. Attendance at
the Granite State Special Meeting will not in itself constitute the revocation
of a proxy. Moreover, a stockholder whose shares are not registered in his or
her name must provide appropriate documentation from the record holder to vote
personally at the Granite State Special Meeting.
Security Ownership. As of the Granite State Record Date, directors and
executive officers of Granite State and their affiliates were beneficial owners
of 556,151 shares (excluding shares underlying unvested stock options that are
not scheduled to vest within 60 days of the Granite State Record Date), or
17.9%, of the then outstanding shares of Granite State Common Stock. The
directors and senior executive officers of Granite State have entered into
voting agreements with Primary Bank whereby such persons have agreed to vote or
cause to be voted the shares of Granite State Common Stock eligible to be voted
by them (481,661 shares in the aggregate) for approval and adoption of the
Agreement at the Granite State Special Meeting. As of the Granite State Record
Date, directors and executive officers of Primary Bank and their affiliates did
not own shares of Granite State Common Stock.
THE BOARD OF DIRECTORS OF GRANITE STATE HAS UNANIMOUSLY APPROVED THE
AGREEMENT, AND UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE
AGREEMENT.
THE PRIMARY BANK SPECIAL MEETING
Meeting Date. The Primary Bank Special Meeting will be held at Monadnock
Country Club, 49 High Street, Peterborough, New Hampshire, on Wednesday,
September 24, 1997 at 11:00 a.m., local time. This Joint Proxy Statement is
being sent to holders of record, and certain beneficial owners, of Primary Bank
Common Stock as of the Primary Bank Record Date and is accompanied by a form of
proxy which the Primary Bank Board requests that stockholders execute and
return to Primary Bank for use at the Primary Bank Special Meeting and at any
and all adjournments or postponements thereof.
Record Date. The record date for the Primary Bank Special Meeting is July
30, 1997 (the "Primary Bank Record Date"). Only holders of record of Primary
Bank Common Stock at the close of business on the
<PAGE> 21
Primary Bank Record Date will be entitled to receive notice of, and to vote at,
the Primary Bank Special Meeting.
Matters to be Considered at the Meeting. At the Primary Bank Special
Meeting, holders of Primary Bank Common Stock will consider and vote upon the
approval of the Agreement and the transactions contemplated thereby, including
the Merger and the conversion of each outstanding share of Primary Bank Common
Stock into a number of shares of Granite State Common Stock determined in
accordance with the terms of the Agreement, and cash in lieu of any fractional
share. Primary Bank stockholders may also consider and vote upon such other
matters as are properly brought before the Primary Bank Special Meeting,
including proposals to adjourn the Primary Bank Special Meeting to permit the
further solicitation of proxies by Primary Bank's Board of Directors in the
event that there are not sufficient votes to approve any proposal at the time
of the Primary Bank Special Meeting; provided, however, that any proxy which is
voted against approval of the Agreement will not be voted in favor of
adjournment to solicit further proxies for such proposal.
Vote Required. The affirmative vote of the holders of two-thirds of the
issued and outstanding shares of Primary Bank Common Stock entitled to vote at
the Primary Bank Special Meeting is required to approve the Agreement. As of
the Primary Bank Record Date there were approximately 586 record holders of
outstanding Primary Bank Common Stock and 2,088,865 shares of Primary Bank
Common Stock entitled to vote at the Primary Bank Special Meeting. Shares
represented by all properly executed proxies received prior to the Primary Bank
Special Meeting and not revoked prior to exercise will be voted in the manner
specified by the holders thereof. Executed proxies which do not contain voting
instructions will be voted in favor of approval and adoption of the Agreement.
Abstentions may be specified on the proxy card. For the vote on the Agreement,
abstentions and broker non-votes will have the same effect as a negative vote
because the affirmative vote of not less than two-thirds of the outstanding
shares of Primary Bank Common Stock is required to approve the Agreement.
It is not expected that any matter, other than those referred to herein,
will be brought before the Primary Bank Special Meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with their judgment with respect to such matters.
The presence, in person or by proxy, of a majority of the outstanding
shares of Primary Bank Common Stock is necessary to constitute a quorum at the
Primary Bank Special Meeting. Primary Bank intends to count non-voting shares,
abstentions and broker non-votes as present at the Primary Bank Special Meeting
for purposes of determining the presence or absence of a quorum for the
transaction of business. In the absence of a quorum, the affirmative vote of a
majority of shares of Primary Bank Common Stock present at the Primary Bank
Special Meeting may authorize the adjournment of the meeting. With a quorum
present, the affirmative vote of a majority of votes cast in person or by proxy
may authorize adjournment of the Primary Bank Special Meeting.
Proxies. Any proxy given pursuant to this solicitation or otherwise may
be revoked by the person giving it at any time before it is voted either by
delivering to the Clerk of Primary Bank at 35 Main Street, Peterborough, New
Hampshire 03458 on or before the taking of the vote at the Primary Bank Special
Meeting, a written notice of revocation bearing a later date than the date of
the proxy or a later dated proxy relating to the same shares or by attending
the Primary Bank Special Meeting and voting in person. Attendance at the
Primary Bank Special Meeting will not in itself constitute the revocation of a
proxy. Moreover, a stockholder whose shares are not registered in his or her
name must provide appropriate documentation from the record holder to vote
personally at the Primary Bank Special Meeting.
<PAGE> 22
Security Ownership. As of the Primary Bank Record Date, directors and
senior executive officers of Primary Bank and their affiliates were beneficial
owners of 507,181 shares (including shares underlying all stock options), or
24.3%, of the then outstanding shares of Primary Bank Common Stock. The
directors and senior executive officers of Primary Bank have entered into
Affiliate Agreements with Granite State whereby such persons have agreed to
vote or cause to be voted the shares of Primary Bank Common Stock eligible to
be voted by them (221,759 shares in the aggregate, or 10.6% of the outstanding
shares) for approval and adoption of the Agreement at the Primary Bank Special
Meeting. As of the Primary Bank Record Date, directors and senior executive
officers of Granite State and their affiliates owned 1,104 shares of Primary
Bank Common Stock. It is expected that such shares will be voted in favor of
the proposals presented for vote at the Primary Bank Special Meeting.
THE BOARD OF DIRECTORS OF PRIMARY BANK HAS UNANIMOUSLY APPROVED THE
AGREEMENT, AND UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE
AGREEMENT.
THE MERGER
The information in this Joint Proxy Statement concerning the Merger is
qualified in its entirety by reference to the full text of the Agreement, which
is attached hereto as APPENDIX A and incorporated by reference herein. All
stockholders are urged to read the Agreement in its entirety.
BACKGROUND OF THE MERGER
Granite State. Since the initial public offering of Common Stock in 1986,
which related to the conversion of Granite Bank from the mutual to the stock
form of organization, Granite State has expanded both internally and through
acquisitions in Cheshire, Hillsborough, Rockingham and Strafford counties.
Between 1986 and 1991, Granite State acquired four institutions, the Durham
Trust Company, First Northern Co-operative Bank, First National Bank of
Peterborough, and the Granite Bank of Amherst, all of which were merged into
Granite Bank. Since 1991, Granite State's efforts have focussed on expanding
its franchise through internal growth and community banking strategies. During
the past several years, however, the pace of consolidation within the banking
industry both on a national basis as well as within the state of New Hampshire
has increased significantly. In light of its overriding goal of providing value
to stockholders, Granite State has monitored developments in the mergers and
acquisitions market with a view toward pursuing favorable opportunities that
may arise.
Following a late-March, 1997 announcement of a merger transaction in New
Hampshire, Charles W. Smith, President and Chief Executive Officer of Granite
State, telephoned Christopher J. Flynn, President and Chief Executive Officer
of Primary Bank, regarding the consolidation taking place in New Hampshire and
the possibilities of a combination of Primary Bank and Granite State. As a
result of this telephone conversation, Messrs. Smith and Flynn held a luncheon
meeting on April 1, at which time a general discussion regarding a possible
merger of Primary Bank with Granite Bank ensued. Further discussions between
Messrs. Smith and Flynn took place on the 2nd and 3rd of April. As a result of
the positive outcome of these discussions, Mr. Smith contacted FBR regarding
the provision of financial advisory services in connection with a possible
merger of Primary Bank into Granite Bank. On April 8th, Granite State and
Primary Bank entered into a confidentiality agreement and thereafter began
exchanging financial and other information regarding the other. During the week
of April 7, a special meeting of the Executive Committee of Granite State was
convened, and the Executive Committee was apprised of developments to date and
the possibility of a merger with Primary Bank involving the issuance of shares
of Granite State Common Stock. On April 10th and 11th the managements of
Granite State and Primary Bank, together with their respective financial and
legal advisors, met in Boston to discuss the possible terms and structure of a
merger between the banks.
<PAGE> 23
The annual meeting of the Board of Directors of Granite State was held on
April 15, at which time the Board was apprised of the discussions with Primary
Bank. In addition, counsel to Granite State discussed the fiduciary duties of
directors in general and in particular in connection with mergers and
acquisitions, and FBR discussed certain of the financial aspects of a possible
merger between the banks. Among other things, such financial aspects included
the likely price range and transaction structure for the acquisition of Primary
Bank, the value of certain components of Primary Bank's balance sheet and
retail banking franchise, a review of comparable merger and acquisition
transactions and a pro forma accretion/dilution analysis of Granite State
following the merger. The Board authorized management, in consultation with its
legal and financial advisors, to proceed with negotiations with Primary Bank as
to a merger and related issuance of Granite State Common Stock. At a special
meeting held on April 28, 1997, Granite State's legal and financial advisors
reviewed with the Board the terms of the proposed Agreement, including the
Exchange Ratio, Stock Option Agreement and related documents, the results of
due diligence reviews, and the financial and valuation analyses of the
transaction. FBR also reviewed certain potential financial and strategic
benefits of the Merger, which included diversification of Granite Bank's loan
portfolio, increased deposit market share, implied pro forma trading ranges and
liquidity for Granite State Common Stock, additional acquisition opportunities
for Granite State and the ability to attract additional market makers, analyst
coverage and enhanced interest from potential acquirors. At the conclusion of
the meeting, the Board unanimously approved the Merger and the Agreement and
authorized management to execute the Agreement on behalf of Granite State. On
April 29, 1997, the Agreement was executed by Primary Bank, Granite State and
Granite Bank, and a joint press release was issued.
Primary Bank. Over the past several years, the management of Primary Bank
has considered a variety of strategic alternatives, including remaining
independent, acquiring other smaller institutions, and entering into a
strategic merger with a similarly sized and situated depository institution.
Each strategic alternative has been reviewed by the Primary Bank Board of
Directors with respect to its ability to enhance profitability and maximize
stockholder value. The changing competitive situation in banking on a
nation-wide basis and specifically in southern New Hampshire has resulted in
increased industry consolidation in recent years. During the past few years the
increasing size of competitors, combined with the product innovations and
technological improvements that can be derived from an increased scale of
operations, has led Primary Bank to recognize that an affiliation or
consolidation with a larger or similarly sized and situated institution could
be beneficial to both Primary Bank's stockholders and customers.
In late March 1997, Charles W. Smith, President and Chief Executive
Officer of Granite State and Granite Bank, first approached Christopher J.
Flynn, President and Chief Executive Officer of Primary Bank regarding Granite
State's interest in a possible business combination between Granite State and
Primary Bank. As a result of this initial contact, a meeting between Messrs.
Flynn and Smith was arranged and held on April 1, 1997. At this meeting,
Messrs. Flynn and Smith spoke in general terms about the business philosophies
of Primary Bank and Granite State, their complementary geographic and product
franchises, potential cost savings to be produced by the combined entity and
the rationale for a business combination between Primary Bank and Granite
State. After this meeting, Mr. Flynn contacted Northeast Capital, Primary
Bank's financial advisor, regarding Granite State's initial interest in Primary
Bank and the provision of financial advisory services in connection with the
possible business combination between Primary Bank and Granite State. Over the
years, Northeast Capital has worked with Primary Bank on various financing,
acquisition and other matters.
On April 2, 1997, Messrs. Flynn, Smith and Mr. William G. Pike, Chief
Financial Officer of Granite State, attended a roundtable discussion for bank
chief executive officers organized by FBR. During breaks in the formal
presentations, Messrs. Flynn, Smith and Pike discussed in general terms the
possibility of a proposed business combination of Primary Bank and Granite
State. On April 3, 1997, Messrs. Smith and Flynn
<PAGE> 24
continued discussions regarding the possibility of a business combination that
would be consistent with a community-based banking strategy. The parties noted
that both Primary Bank and Granite State had strong local identities in their
respective communities, and they agreed on the value of avoiding disruption of
the strong relationships that each had with its customers and communities.
After the April 3rd meeting, Mr. Flynn again discussed a possible
business combination between Primary Bank and Granite State. Mr. Flynn
requested that Northeast Capital prepare an analysis of possible exchange
ratios in connection with possible business combinations based upon the
relative values of the Primary Bank Common Stock and the Granite State Common
Stock.
On April 8, 1997, Primary Bank and Granite State entered into a
confidentiality agreement for the purpose of allowing each to commence a due
diligence investigation of the operations of the other. From April 14 through
April 25, 1997, the parties conducted their respective due diligence
investigations.
After a report by Mr. Flynn on his favorable discussions with Granite
State, at a meeting held in Boston, Massachusetts on April 10, 1997, the Merger
and Acquisition Committee of the Primary Bank Board of Directors (the "M&A
Committee") agreed that Mr. Flynn should further explore the possibility of
Primary Bank entering into a business combination with Granite State. Later
that day, Mr. Flynn, certain other Primary Bank executive officers and
Northeast Capital met Mr. Smith, certain other Granite State executive officers
and FBR to discuss Northeast Capital's and FBR's respective analyses of
possible business combinations, representation on the board of directors of the
combined entity, valuations of the Primary Bank Common Stock and possible
exchange ratios. On April 11, 1997, Messrs. Flynn and Smith and the financial
and legal advisors reconvened to discuss the possible cost savings of a
combined entity and possible exchange ratios.
On April 14, 1997, during a series of telephone calls, Granite State's
management and legal counsel, and FBR and Northeast Capital, discussed several
proposals regarding board representation and an exchange ratio in a merger
transaction. After some negotiation that day, the managements of Primary Bank
and Granite State reached a consensus on general terms of the board
representation of the combined entity and an exchange ratio based in part upon
varying prices for Granite State Common Stock.
On April 16, 1997, Mr. Flynn, Mr. Michael J. Janosco, Jr., Chief
Financial Officer of Primary Bank, Primary Bank's legal counsel, and Northeast
Capital met again with the M&A Committee to discuss certain terms of the
proposed merger, board representation of the combined entity and the exchange
ratio. At this meeting, Northeast Capital gave a presentation regarding the New
Hampshire banking market, strategic alternatives for Primary Bank, and the
terms of the proposed merger of Primary Bank and Granite Bank. The possible
acquisition of Granite State by Primary Bank was also discussed at the meeting.
Primary Bank reviewed the implications of acquiring Granite State at various
hypothetical purchase prices. The dilution levels at even the lowest
hypothetical purchase price considered, assuming $3 million in cost savings, no
transaction costs and structuring the acquisition as a "pooling of interests"
which is normally the least dilutive structure, were viewed by the M&A
Committee to be unacceptable. Northeast Capital then expressed its view of
certain financial and strategic benefits that would accrue to Primary Bank and
its shareholders as a result of a combination with Granite State. The M&A
Committee reviewed the benefits of an acquisition by Granite State to be the
creation of a larger combined entity, with greater geographic and product
diversity than either would have operating on a stand-alone basis. The M&A
Committee also viewed the resulting back-office and other efficiencies as being
of benefit to Primary Bank's shareholders. After discussion of the Northeast
Capital presentation, the M&A Committee authorized Mr. Flynn to continue
discussions with Mr. Smith regarding specific terms of the merger of Primary
Bank with and into Granite Bank. Granite State commenced a due diligence review
of Primary Bank on April 16, 1997. Primary Bank commenced a due diligence
review of Granite State on April 21, 1997.
<PAGE> 25
From April 19 through April 21, 1997, the parties further negotiated the
specific terms of the Merger and the Agreement. On April 24, 1997, Messrs.
Flynn, Janosco, Smith, Pike, Charles P. Monaghan, Senior Vice President and
Chief Loan Officer of Primary Bank, William C. Henson, Executive Vice President
of Granite State, Charles B. Pacquette, Executive Vice President of Granite
State, Northeast Capital, FBR and Primary Bank's legal counsel met again to
discuss the specific terms of the Merger, the Agreement (including the Exchange
Ratio) and the proposed stock option agreement, as well as the respective
lending "cultures" of the banks, the maintenance of operating philosophies and
the need to retain certain Primary Bank employees.
At a regular meeting of the Primary Bank Board of Directors held April
28, 1997, the Primary Bank Board of Directors reviewed with senior management
executives, Northeast Capital and Primary Bank's legal counsel the terms and
conditions of the proposed merger, the merger agreement, the Stock Option
Agreement, the transactions contemplated by each, the results of the due
diligence investigation of Granite State, the benefits of strategic
alternatives, the banking market in southern New Hampshire, and the financial
and valuation analyses of the proposed merger. Northeast Capital and the
Primary Bank Board of Directors reviewed the possible strategic alternative of
future acquisitions of other depository institutions by Primary Bank. The
Primary Bank Board of Directors after some discussion rejected this alternative
because of the small number of alternative acquisition possibilities, the costs
associated with such transactions relative to their size and resulting
benefits, and the likely resulting dilution to Primary Bank Common Stock. The
other strategic alternative discussed during Northeast Capital's presentation
was Primary Bank's continued operations without significant growth and
expansion. The Primary Bank Board of Directors determined that such a course of
action was not feasible because of the magnitude of the investment in
technology and related information required to remain competitive and the
inability of Primary Bank to generate sufficiently attractive returns to
shareholders at its current size level in light of such competitive pressures.
The Board of Directors of Primary Bank discussed with Primary Bank's legal
counsel their fiduciary duties with respect to decisions regarding mergers and
acquisitions. At this meeting, various Primary Bank directors raised concerns
regarding the proposed size and composition of the Granite Bank board following
the merger and the number of options for Primary Bank Common Stock to be
granted to Granite State pursuant to the proposed stock option agreement.
Certain Primary Bank directors were concerned that the proposed level of board
representation by Primary Bank's directors was not reflective of the percentage
ownership of Primary Bank shareholders in the combined entity. After discussion
of the consideration to be received by Primary Bank shareholders, the Primary
Bank Board of Directors decided that acceptance of Granite State's proposal was
in the best interests of the Primary Bank shareholders. After much discussion,
the Primary Bank Board of Directors also authorized Mr. Flynn to proceed with
further negotiations with Granite State concerning the terms of the stock
option agreement. All of the fifteen Primary Bank directors were present with
Messrs. Fernald, McKerley and Wagner, participating by telephone during a
substantial part of the Board of Directors meeting.
On the morning of April 29, 1997, Mr. Flynn, Primary Bank's legal counsel
and Northeast Capital reached a conclusion with Mr. Smith, Granite State's
legal counsel and FBR with respect to the terms of the Stock Option Agreement.
The negotiations among the parties resulted in a proposal which met the
objective of compensating Granite State for opportunity costs and expense if
the Stock Option Agreement were triggered and the proposed merger were not
consummated. At a special meeting of the Primary Bank Board of Directors held
April 29, 1997, after Mr. Flynn reported the results of negotiations held that
morning the Primary Bank Board of Directors unanimously adopted and approved
the Merger, the Agreement, the Stock Option Agreement, and the transactions
contemplated by each. Of the fifteen Primary Bank directors, twelve were
present in person or by telephone and voted in favor of the Merger, the
Agreement, the Stock Option Agreement, and the transactions contemplated by
each at the April 29, 1997 meeting. The three directors absent from the April
29, 1997 meeting of the Primary Bank Board of Directors were Messrs. Fernald,
McKerley and Wagner.
<PAGE> 26
At the July 28, 1997 meeting of the Primary Bank Board of Directors, the
Merger, the Agreement, the Stock Option Agreement and the Merger pursuant
thereto was unanimously ratified.
REASONS FOR THE MERGER
Granite State's Reasons for the Merger. In reaching its determination
that the Merger and the Merger Agreement are fair to, and in the best interests
of, the Company and its stockholders, the Granite State Board consulted with
its financial advisors with respect to the financial aspects and fairness of
the transaction. The Granite State Board also considered a number of factors
which indicated that the Merger should produce an institution that is well
capitalized, and one which will enjoy enhanced operational and strategic value
and that should foster the potential for earnings growth. The factors
considered by the Granite State Board included, but were not limited to, the
following:
(i) Information concerning the businesses, earnings, operations,
financial condition, prospects, capital levels and asset quality of
Granite State and Primary Bank individually and as combined, including
the period within, and extent to which the Merger could be expected to be
accretive to Granite State's earnings and book value per share. In this
regard the Board considered its internal projections that the Merger
would be accretive to earnings per share and book value per share within
the first 12 months following the completion of the Merger.
(ii) The financial advice rendered by FBR to Granite State that the
Exchange Ratio in the Merger is fair, from a financial point of view, to
the stockholders of Granite State. See "--Opinion of Financial Advisor to
Granite State."
(iii) The terms of the Agreement, the Stock Option Agreement and
the other documents executed in connection with the Merger, including the
anticipated accounting treatment of the Merger as a "pooling of
interests" and the nature of the Merger as a tax-free reorganization for
federal income tax purposes.
(iv) The anticipated extent of cost savings, efficiencies and
reduced expenses available to the combined company as a result of the
Merger. In this regard the Board considered its internal projections that
the Merger would result in approximately a 35% reduction in the expenses
attributable to the operations of Primary Bank prior to the Merger.
(v) The current and prospective economic, competitive and
regulatory environment facing each institution and the institutions as
combined, including without limitation the consolidation currently
underway in the banking industry, competition from larger institutions
and from nonbank providers of financial services.
(vi) The results of the due diligence investigations of Primary
Bank, including assessment of credit policies, asset quality, interest
rate risk, litigation and adequacy of loan loss reserves.
(vii) The individual and combined prospects for internal growth,
and ability to deliver expanded products and services, and other
anticipated impacts on depositors, employees, customers and communities
served by Granite State and Primary Bank, and Primary Bank's commercial
and industrial lending and the extent to which such lending complements
Granite Bank's small business lending expertise.
<PAGE> 27
In reaching its determination to approve the Agreement and the Merger,
the Board did not assign any specific or relative weight to any of the
foregoing factors, and individual directors may have given differing weights to
different factors.
Primary Bank's Reasons for the Merger. Primary Bank's Board of Directors
has determined that the Merger and the Agreement are fair to, and in the best
interests of, Primary Bank and its stockholders. In reaching this
determination, the Primary Bank Board of Directors consulted with its financial
advisor Northeast Capital with respect to the financial aspects and fairness of
the transaction. In arriving at its determination, the Primary Bank Board of
Directors also considered a number of factors which indicated that the Merger
should produce an institution that is well capitalized, one that would achieve
cost savings, and one which will enjoy enhanced operational and strategic
value, each of which should foster the potential for further earnings growth.
The factors considered by the Primary Bank Board of Directors include, but were
not limited to, the following:
(i) Information concerning the businesses, earnings, operations,
financial condition, prospects, capital levels, and asset quality of
Primary Bank and Granite Bank, both individually and as combined;
(ii) The financial advice rendered by Northeast Capital, as
financial advisor to Primary Bank, that the Exchange Ratio is fair from a
financial standpoint to Primary Bank and its stockholders. (See
"--Fairness Opinion of Financial Advisor to Primary Bank");
(iii) The terms of the Agreement, as amended, the Stock Option
Agreement and the other documents executed in connection with the Merger;
(iv) The tax-free nature of the transaction to Primary Bank's
stockholders for Federal income tax purposes;
(v) The historical trading prices for Primary Bank Common Stock and
the Granite State Common Stock and published analysts' reports concerning
the value of Primary Bank Common Stock, including a report by an FBR
analyst which presented a value for Primary Bank Common Stock in excess
of the value used as a basis to establish the Exchange Ratio.
(vi) The anticipated cost savings and efficiencies available to the
combined entity as a result of the Merger;
(vii) The current and prospective economic, competitive and
regulatory environment facing each institution and other financial
institutions;
(viii) Primary Bank's strategic alternatives to the Merger,
including continued operations in the present manner and Primary Bank's
acquisition of other financial institutions;
(ix) The terms of the Agreement which allow Primary Bank to
terminate the Agreement if: (a) the Granite State Market Value is less
than $13.533; (b) either party is notified that a necessary regulatory
approval is unlikely to be granted; (c) Primary Bank or Granite State
stockholder approval is not obtained; (d) Primary Bank enters into an
agreement relating to a Superior Acquisition Proposal; or (e) the Primary
Bank Board of Directors fails to make a recommendation to the Primary
Bank shareholders to approve the Merger and the Agreement or withdraws,
modifies or changes such recommendation if the Primary Bank Board of
Directors, after having consulted with and considered
<PAGE> 28
the written advice of Goodwin, Procter & Hoar LLP, legal counsel to
Primary Bank, has determined that there is a reasonable basis to conclude
that the making of such recommendation or the failure to withdraw, modify
or change its recommendation, would constitute a breach of fiduciary
duties of such directors under New Hampshire law.
The Primary Bank Board of Directors also took into account that the
Primary Bank stockholders would have the opportunity to participate in the
future growth of Granite State by obtaining Granite State Common Stock in the
Merger and to receive dividends.
The Primary Bank Board determined that, based on many factors, the Merger
will result in a stronger and more effective competitor in the rapidly changing
marketplace for banking services and will allow the combined entity to take
advantage of opportunities that might not be available to Primary Bank on its
own. The Primary Bank Board of Directors believes that the Merger will provide
Primary Bank's depositors and other customers with a broader range of products
and services as well as greater convenience. In reaching their determination to
approve and recommend the Merger, the Primary Bank Board did not assign any
specific or relative values to any of the foregoing factors, and individual
directors may have given differing value to different factors.
RECOMMENDATION OF THE BOARDS OF DIRECTORS
Granite State. The Granite State Board of Directors has unanimously
adopted and approved the Agreement and the transactions contemplated thereby
and has determined that the Merger and the issuance of the shares of Granite
State Common Stock pursuant thereto are fair to and in the best interests of
Granite State and its stockholders. THE GRANITE STATE BOARD OF DIRECTORS
THEREFORE UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE AGREEMENT.
For a discussion of factors considered by the Granite State Board of
Directors in reaching its decision to approve the Merger Agreement, see
"--Background of and Reasons for the Merger."
Primary Bank. The Primary Bank Board of Directors has adopted and
approved the Agreement and the transactions contemplated thereby and has
determined that the Merger is fair to, and in the best interests of, Primary
Bank and its stockholders. THE PRIMARY BANK BOARD OF DIRECTORS THEREFORE
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT.
For a discussion of factors considered by the Primary Bank Board in
reaching its decision to approve the Merger Agreement, see "--Background of and
Reasons for the Merger."
TERMS OF THE MERGER
The Share Exchange. In accordance with the terms of the Agreement, on the
Effective Date Primary Bank will be merged with and into Granite Bank. Granite
Bank, as the surviving entity in the Merger, and Granite State will continue
unaffected by the Merger. Also on the Effective Date, each share of Primary
Bank Common Stock issued and outstanding immediately prior to the Effective
Date will be converted into a number of shares of Granite State Common Stock
determined based on the Exchange Ratio described below, and cash in lieu of any
fractional share of Granite State Common Stock.
The Exchange Ratio shall be determined as follows: (i) if the Granite
State Trading Price is greater than or equal to $13.533 and less than or equal
to $16.917, then the Exchange Ratio shall be equal to $25.25
<PAGE> 29
divided by the Granite State Trading Price; (ii) if the Granite State Trading
Price is greater than $16.917 and less than or equal to $18.185, then the
Exchange Ratio shall be equal to 1.4926; (iii) if the Granite State Trading
Price is greater than $18.185, then the Exchange Ratio shall be equal to
$27.144 divided by the Granite State Trading Price; or (iv) if the Granite
State Trading Price is less than $13.533, then the Exchange Ratio shall be
equal to 1.8658. If the Granite State Trading Price is less than $13.533, then
Primary Bank shall also have the right to terminate the Agreement. See
"--Termination; Effect of Termination." In determining whether to terminate the
Agreement in the event the Granite State Trading Price is less than $13.533, in
addition to the decrease in value of the Granite State Common Stock, the
Primary Bank Board of Directors will also consider whether there has been a
significant change in asset quality of Granite State, any other material
adverse change in the financial condition, business or prospects of Granite
State, or a material adverse change in the broader market for bank stocks
generally.
The following table shows the Exchange Ratio at various Granite State
Trading Prices together with the consideration to be received for each share of
Primary Bank, based on the Granite State Trading Price and the Exchange Ratio.
Because the Granite State Trading Price is an average price calculated over a
period of time, the market price of Granite State Common Stock at the Effective
Date could differ from the Granite State Trading Price used to determine the
Exchange Ratio, and the actual value of the shares issued in the Merger
therefore could differ from the amount set forth in the following table.
<TABLE>
<CAPTION>
GRANITE STATE CONSIDERATION FOR EACH
TRADING PRICE EXCHANGE RATIO<F1> PRIMARY BANK SHARE
------------- ------------------ ----------------------
<S> <C> <C>
more than $18.185 $27.144 divided by Granite $27.14
State Trading Price <F2>
more than $16.917, to $18.185 1.4926 $25.25 to $27.14
$13.533 to $16.917 1.8658 to 1.4926 $25.25
less than $13.533 1.8658 <F3> $25.25 or less <F3>
<FN>
- --------------------
<F1> The Exchange Ratio represents the number of shares of Granite State
Common Stock that would be received for each share of Primary Bank Common
Stock. For example, if the Granite State Trading Price is more than
$16.917, to $18.185, then 1.4926 shares of Granite State Common Stock
would be received for each share of Primary Bank Common Stock.
<F2> If the Granite State Trading Price equals $18.186 then the Exchange Ratio
will be 1.4926. The Exchange Ratio will decrease as the hypothetical
Granite State Trading Price increases above $18.186.
<F3> Primary Bank may, but need not, terminate the Agreement if the Granite
State Trading Price is less than $13.533.
</FN>
</TABLE>
The percentage of the outstanding shares of Granite State Common Stock
immediately following the completion of the Merger that would have been
converted from shares of Primary Bank Common Stock into shares of Granite State
Common Stock in connection with the Merger will range from approximately 59.2%
(if the Granite State Trading Price is less than $13.533) to approximately
53.8% if the Granite State Trading Price is $18.185, and decrease below 53.8%
as the hypothetical Granite State Trading Price increases above $18.185. The
last reported sale price of Granite State Common Stock on July 30, 1997 was at
a price of $20.625. If the Granite State Trading Price were equal to such
price, for example, then the Exchange Ratio and the number of shares of Granite
State Common Stock that would be received for each share of Primary Bank Common
Stock would be 1.3161. The actual Granite State Trading Price will not be
determined until the fifth business day before the Effective Date. Because the
Effective Date may be more than five days after the date of the Special
Meetings, there can be no assurance of the actual Granite State Trading Price
at the time of such
<PAGE> 30
meetings. See "INFORMATION WITH RESPECT TO GRANITE STATE" and "INFORMATION WITH
RESPECT TO PRIMARY BANK" for information regarding historical price performance
of Granite State Common Stock and Primary Bank Common Stock.
Any cash payment in lieu of any fractional share will be in an amount
equal to such fraction multiplied by the Granite State Trading Price.
In the event that, prior to the Effective Date, the outstanding shares of
Granite State Common Stock shall have been increased, decreased, changed into
or exchanged for a different number or kind of shares or securities as a result
of a reorganization, recapitalization, reclassification, stock split, or other
like changes in Granite State's capitalization, or if a stock dividend thereon
is declared with a record date before the Effective Date, then an appropriate
and proportionate adjustment shall be made to the Exchange Ratio.
Granite State and Primary Bank believe that the Merger will be completed
within 60 days of the Special Meetings, although there can be no assurances in
this regard. The Agreement provides that if the Merger has not been completed
on or before February 28, 1998, then in certain circumstances Granite State or
Primary Bank may terminate the Agreement. See "Termination; Effect of
Termination."
Stock Options. On the Effective Date, each outstanding stock option to
purchase Primary Bank Common Stock ("Primary Bank Stock Option"), will be
assumed by Granite State. Each Primary Bank Stock Option assumed by Granite
State shall continue to be subject to the same terms and conditions set forth
in the Primary Bank Stock Option Plans immediately prior to the Effective Date,
except that (i) such Primary Bank Stock Options shall be exercisable for a
number of shares of Granite State Common Stock equal to the product of the
number of shares of Primary Bank Common Stock covered by the Primary Bank Stock
Option multiplied by the Exchange Ratio; and (ii) the exercise price per share
of Granite State Common Stock shall be equal to the exercise price per share of
Primary Bank Common Stock of such Primary Bank Stock Option, divided by the
Exchange Ratio.
OPINION OF FINANCIAL ADVISOR TO GRANITE STATE
The obligation of Granite State to complete the Merger is subject to the
condition that Granite State receive a written opinion from FBR on or before
the date of the Agreement and updated in writing as of a date within five days
of the mailing of this Joint Proxy Statement. The August 8, 1997 fairness
opinion from FBR, which is attached hereto as APPENDIX B, states that as of the
date of such opinion, the consideration terms set forth in the Agreement are
fair to Granite State stockholders. The opinion does not address whether the
Merger will be fair to Granite State stockholders as of the date of the Granite
State Special Meeting or the Effective Date based on any hypothetical Granite
State Trading Price.
FBR was selected by Granite State to act as financial advisor in
connection with the Merger based on FBR's experience, expertise and familiarity
with Granite State and its business. FBR is a nationally recognized investment
banking firm and is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
In connection with FBR's engagement, Granite State requested that FBR
evaluate the fairness, from a financial point of view, to Granite State's
stockholders of the consideration to be paid by Granite State in connection
with the proposed Merger. At a meeting of the Granite State Board held on April
15, 1997, FBR made a presentation to the Granite State Board in which FBR
analyzed an exchange ratio of up to 1.5015 (split
<PAGE> 31
adjusted) and rendered to the Granite State Board an oral opinion to the effect
that, as of such date and based upon and subject to certain matters, such
exchange ratio was fair to the stockholders of Granite State from a financial
point of view. At a subsequent meeting of the Granite State Board held on April
28, 1997 at which the Granite State Board approved the Exchange Ratio of 1.4926
(split adjusted) per share, FBR rendered to the Granite State Board an oral
opinion to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the Exchange Ratio was fair to the
stockholders of Granite State from a financial point of view. At the April 28,
1997, Granite State Board meeting, the Granite State Board unanimously approved
and authorized the execution and delivery of the Agreement including provisions
relating to the Exchange Ratio. FBR confirmed its oral opinions by delivery of
a written opinion dated the date of this Joint Proxy Statement. In connection
with its oral opinion of April 28, 1997 and written opinion dated the date of
this Joint Proxy Statement, FBR updated certain of its analyses, as necessary,
and reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
In arriving at its opinion dated the date of this Joint Proxy Statement,
FBR reviewed the Agreement and certain related documents, this Joint Proxy
Statement and certain publicly available business and financial information
relating to Granite State and Primary Bank. FBR also reviewed certain other
information, including financial forecasts, provided to FBR by Granite State
and Primary Bank and met with the respective managements of Granite State and
Primary Bank to discuss the businesses and prospects of Granite State and
Primary Bank. FBR also considered certain financial and stock market data of
Granite State and Primary Bank and compared such data with similar data for
other publicly held companies in businesses similar to those of Granite State
and Primary Bank and considered, to the extent publicly available, the
financial terms of certain other business combinations and other transactions
which have recently been effected. FBR also considered such other information,
financial studies, analyses and investigations and financial, economic and
market criteria that FBR deemed relevant.
In connection with its review, FBR did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by FBR and relied upon its being complete and accurate in all material
respects. With respect to the financial forecasts reviewed, FBR assumed that
such forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management teams of Granite State and
Primary Bank as to the future financial performance of Granite State and
Primary Bank and the cost savings and other potential synergies (including the
amount, timing and achievability thereof) anticipated to result from the
Merger. FBR did not review individual credit files or make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Granite State or Primary Bank, including loan or lease portfolios or the
allowances for losses with respect thereto, and assumed, that such allowances
for Granite State and Primary Bank are, in the aggregate, adequate to cover
such losses. FBR also assumed, with the consent of the Granite State Board,
that in the course of obtaining the necessary regulatory and third party
consents for the Merger, no restriction will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger or the
transactions contemplated thereby. FBR's opinion was necessarily based on
information available to it and financial, stock market and other conditions as
they existed and could be evaluated on the date of its opinion. FBR expressed
no opinion as to what the value of the Granite State Common Stock actually
would be when issued to Primary Bank's stockholders pursuant to the Merger or
the prices at which such Granite State Common Stock would trade subsequent to
the Merger. No other limitations were imposed by Granite State on FBR with
respect to the investigations made or procedures followed by FBR in rendering
its opinion.
THE FULL TEXT OF FBR'S WRITTEN OPINION TO THE GRANITE STATE BOARD DATED THE
DATE OF THIS JOINT PROXY STATEMENT, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
APPENDIX B TO THIS JOINT PROXY STATEMENT AND
<PAGE> 32
IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF GRANITE STATE COMMON STOCK ARE
URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. FBR'S OPINIONS ARE
DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF
VIEW TO THE STOCKHOLDERS OF GRANITE STATE, DO NOT ADDRESS ANY OTHER ASPECT OF
THE PROPOSED MERGER OR ANY RELATED TRANSACTION AND DO NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
GRANITE STATE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF FBR SET FORTH IN
THIS JOINT PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION.
In preparing its opinion for the Granite State Board, FBR performed a
variety of financial and comparative analyses, including those described below,
in connection with its presentations to the Granite State Board on April 15,
1997 and April 28, 1997. The summary of FBR's analyses set forth below does not
purport to be a complete description of the analyses underlying FBR's opinion.
The preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. In arriving at its opinion, FBR made qualitative judgments
as to the significance and relevance of each analysis and factors considered by
it. Accordingly, FBR believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors, without considering
all analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In its analyses, FBR made
numerous assumptions with respect to Granite State, Primary Bank, industry
performance, regulatory, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Granite
State and Primary Bank. No company, transaction or business used in such
analyses as a comparison is identical to Granite State, Primary Bank or the
Merger, nor is an evaluation of the results of such analyses entirely
mathematical; rather, it involves complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions being analyzed. The estimates contained in
such analyses and the valuations resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, because such
estimates are inherently subject to substantial uncertainty, none of Granite
State, Primary Bank, FBR or any other person assumes responsibility for their
accuracy. As described above, FBR's opinion and financial analyses were only
one of many factors considered by the Granite State Board in its evaluation of
the Merger and should not be viewed as determinative of the views of Granite
State's Board or management with respect to the Exchange Ratio or the proposed
Merger.
The following is a summary of the material analyses performed by FBR in
connection with its opinion and financial presentations made to the Granite
State Board on April 15, 1997 and April 28, 1997:
Introduction. FBR calculated the price per share, premium to market,
price to March 31, 1997 book value and tangible book value, price to March 31,
1997, last twelve months ("LTM") earnings per share ("EPS") and price to
estimated fiscal 1997 EPS for Primary Bank implied by the Exchange Ratio. Using
closing stock prices for Granite State Common Stock and Primary Bank Common
Stock on April 29, 1997, the proposed Exchange Ratio implied a price per share
for Primary Bank Common Stock of $25.25, a premium to market of 8.02%, a price
to estimated book value and tangible book value of 1.81x and 1.81x,
respectively, and a price to March 31, 1997 LTM EPS of 16.56x and estimated
fiscal 1997 EPS of 16.05x. EPS estimates
<PAGE> 33
for Primary Bank were based on consensus estimates, as of April 29, 1997,
published by IBES, a data service which monitors and publishes a compilation of
earnings estimates produced by selected research analysts on companies of
interest to investors.
Comparable Companies Analysis. FBR analyzed certain information relating
to transactions in the thrift industry, including average and median
information for 115 acquisitions announced in the U.S. between January 1, 1996
and April 29, 1997, as well as for 15 thrift acquisitions announced in New
England and four thrift acquisitions announced in New Hampshire during that
same time period. FBR also analyzed certain thrift transactions announced in
the U.S. between January 1, 1996 and April 29, 1997, including: six
acquisitions involving sellers with total assets between $400 million to $500
million; 29 acquisitions involving sellers with a ratio of non-performing
assets to total assets of 1%-2%; 29 acquisitions involving sellers with a
return on asset ("ROA") ratio between 0.50% and 0.75%; 12 acquisitions
involving sellers with a return on equity ("ROE") ratio between 8% and 10%; 16
acquisitions involving sellers with an equity to assets ratio between 6% and
7%; and 49 acquisitions involving sellers that received 100% of the transaction
consideration in the form of stock (collectively the "Selected Transactions").
FBR calculated the following ratios with respect to the Merger, based on the
acquisition of 2,448,547 fully diluted common stock equivalents of Primary Bank
(with stock options shown net of exercise price) at an exchange ratio of 1.4926
(split adjusted), a stock price of $16.958 for Granite State (split adjusted)
and the Selected Transactions:
<TABLE>
<CAPTION>
AT ANNOUNCEMENT
----------------------------------------------------------------
DEAL DEAL DEAL VALUE/ TANGIBLE BOOK
VALUE/BOOK VALUE/TANGIBLE RECENT PREMIUM/CORE
DEAL VALUE BOOK VALUE QUARTER DEPOSITS
VALUE<FA> (%) (%) ANNUALIZED EPS (%)
------------- -------------- -------------- -------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NATIONWIDE 115 Transactions
- ----------
Average 209.0 154.90 159.47 22.95 8.12
Median 32.4 150.76 153.10 18.34 7.32
NEW ENGLAND 15 Transactions
- -----------
Average 100.5 156.76 164.59 17.08 8.62
Median 94.0 150.73 161.49 16.28 7.11
NEW HAMPSHIRE 4 Transactions
- -------------
Average 81.5 172.38 174.47 17.17 12.89
Median 97.2 160.14 160.14 16.90 12.28
ASSETS $400M-$500M 6 Transactions
- ------------------
Average 61.3 139.96 146.34 15.67 6.66
Median 67.7 140.26 150.04 16.75 7.51
NPAS/ASSETS (1%-2%) 29 Transactions
- -------------------
Average 452.5 157.48 164.01 20.88 7.47
Median 86.9 154.22 161.49 15.91 7.10
ROA (0.5%-0.75%) 29 Transactions
- ----------------
Average 377.9 158.92 162.32 25.98 7.07
Median 32.9 154.73 159.67 18.02 6.42
<PAGE> 34
<CAPTION>
AT ANNOUNCEMENT
----------------------------------------------------------------
DEAL DEAL DEAL VALUE/ TANGIBLE BOOK
VALUE/BOOK VALUE/TANGIBLE RECENT PREMIUM/CORE
DEAL VALUE BOOK VALUE QUARTER DEPOSITS
VALUE<FA> (%) (%) ANNUALIZED EPS (%)
------------- -------------- -------------- -------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ROE (8%-10%) 12 Transactions
- ------------
Average 150.9 169.33 173.73 26.24 10.68
Median 41.9 160.53 166.57 17.36 10.90
EQUITY/ASSETS (6%-7%) 16 Transactions
- ---------------------
Average 563.5 183.77 189.70 25.21 8.42
Median 65.1 166.63 174.53 17.22 7.17
STOCK DEALS 49 Transactions
- -----------
Average 159.4 167.83 175.07 20.15 10.14
Median 67.7 158.45 168.54 17.40 8.46
PRIMARY BANK 58.1<FA><FB> 180.95<FB><FC> 180.95<FB><FC> 16.56 8.49<FB><FC>
- ------------
<FN>
- --------------------
<FA> Reported purchase price paid .
<FB> Purchase price includes all stock paid for the outstanding stock
and options of Primary Bank (net of exercise price).
<FC> Book value is at March 31, 1997 adjusted for the add-back of the
exercise price of options.
</FN>
</TABLE>
No company or transaction used in the above analyses as a comparison is
identical to Primary Bank, Granite State, or the Merger. Accordingly, an
analysis of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other facts that could affect the public
trading value of the companies to which they are being compared.
Discounted Cash Flow Analysis. FBR estimated the present value of the
future streams of distributable after-tax cash flows that Primary Bank could
produce on a stand-alone basis through fiscal year 2000. FBR assumed that
Primary Bank would perform substantially in accordance with the earnings
forecasts of selected investment banking firms which publicly provided
financial forecasts for Primary Bank for fiscal year 1997. This analysis
yielded EPS estimates for Primary Bank in fiscal year 1997 of approximately
$1.90. Based on various assumptions as to the operational and financial
performance of Primary Bank in fiscal years 1998 through 2000, FBR utilized EPS
estimates for Primary Bank for fiscal years 1998, 1999 and 2000 of
approximately $1.40, $1.61, and $1.85, respectively, which resulted in a
compounded annual growth rate in Primary Bank's EPS of approximately 15%. FBR
further assumed that Primary Bank would not distribute any of its earnings to
stockholders, as Primary has never paid a cash dividend. In estimating the
terminal values of Primary Bank Common Stock, FBR considered a range of
valuation methodologies, including price to earnings ratios, perpetual earnings
growth and price to book multiples. Based upon Primary Bank's financial and
other characteristics, FBR estimated the terminal values for Primary Bank
Common Stock using 16.0x to 18.5x net earnings multiples in the terminal year.
The distributable net income streams and terminal values were then discounted
to present values using discount rates of between 10% and 12%. This discounted
cash flow analysis indicated an equity reference range of $15.93 to $21.24 per
fully diluted share of Primary Bank Common Stock.
In addition to performing the above described discounted cash flow
analysis on Primary Bank's distributable net income streams and terminal values
without giving effect to the potential net cost savings, FBR estimated the
present value of the future streams of after-tax cash flows generated by the
net cost savings
<PAGE> 35
which Granite State's management estimated could be generated as a result of
the Merger. In performing this analysis, FBR utilized the $4.5 million of net
pre-tax cost savings per year which Granite State's management estimated could
be generated within 18 months of closing the Merger, a 12% discount rate and no
growth rate regarding perpetual dividends. FBR assumed, for purposes of such
analysis, that 100% of the after-tax earnings stream created as a result of the
cost savings could be quickly reinvested and further assumed that an upfront
restructuring charge of $4.4 million would be required in order to realize such
cost savings. After deducting the restructuring charge, this analysis yielded a
present incremental equity value for Primary Bank following the Merger of
approximately $20.2 million, or an additional $8.29 per fully diluted share of
Primary Bank Common Stock.
Contribution Analysis. FBR analyzed the contribution of each of Granite
State and Primary Bank to, among other things, total assets and common equity
at March 31, 1997, net income for the three months ended March 31, 1997 and
projected net income for fiscal 1997 of the pro forma combined company. Granite
State's contribution in terms of total assets and common equity at March 31,
1997 equaled approximately 46.56% and 50.85%, respectively, while Granite
State's contribution in terms of net income for the three months ended March
31, 1997 and projected net income for fiscal 1997 equaled approximately 70.6%
(includes a nonrecurring pre-tax securities gain of $2.0 million) and 53%,
respectively. Based upon an Exchange Ratio of 1.4926 and shares of Granite
State Common Stock and Primary Bank Common Stock outstanding on March 31, 1997,
holders of Granite State Common Stock would own approximately 47.54% of the
combined company upon consummation of the Merger.
Pro Forma Merger Analysis. FBR noted that, based upon estimates of
Granite State's management and after giving effect to Granite State
management's net pretax cost savings estimates and certain assumptions as to,
among other things, the number of shares outstanding in each respective period,
the proposed Merger could, at a 1.4926 Exchange Ratio, be accretive to Granite
State's reported EPS on a fully diluted basis in fiscal years 1998, 1999 and
2000 by approximately 7.86%, 14.55% and 21.62%, respectively. In this analysis,
FBR assumed that both Granite State and Primary Bank would perform
substantially in accordance with earnings forecasts provided to FBR by Granite
State's management. The actual results achieved by the combined company may
vary from projected results and the variations may be material.
Certain Other Factors and Comparative Analyses. In rendering its opinion,
FBR considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of the historical financial
results and stock price performance of Granite State and Primary Bank and the
market capitalization of selected companies involved in transactions similar to
the proposed Merger both before and after such transactions.
Pursuant to the terms of FBR's engagement, Granite State has agreed to
pay FBR for its services in connection with the Merger an aggregate financial
advisory fee of $310,000, payable as follows: (i) $25,000 upon execution of
FBR's engagement letter; (ii) $71,250 upon the signing of a definitive
agreement providing for the Merger; and (iii) the balance upon the closing of
Granite State's acquisition of Primary Bank. Granite State also has agreed to
reimburse FBR for its reasonable out-of-pocket expenses, including the fees and
expenses of legal counsel and any other advisor retained by FBR, and to
indemnify FBR and its affiliates and their respective directors, officers,
employees, agents and controlling persons against any losses, claims, damages,
and liabilities, to which such persons may become subject under federal or
state law relating to the services provided under the engagement letter.
In the ordinary course of business, FBR and its affiliates may actively
trade the equity securities of Granite State and Primary Bank for their own
account and for accounts of customers and, accordingly, may at any time hold a
long or short position in such securities. FBR may provide additional financial
advisory and investment banking services to Granite State in the future.
<PAGE> 36
OPINION OF FINANCIAL ADVISOR TO PRIMARY BANK
The obligation of Primary Bank to complete the Merger is subject to the
condition that Primary Bank receive a written opinion from Northeast Capital on
or before the date of the Agreement and updated in writing as of a date within
five days of the mailing of this Joint Proxy Statement. The August 8, 1997
fairness opinion from Northeast Capital, which is attached hereto as APPENDIX
C, states that as of the date of such opinion, the Exchange Ratio terms set
forth in the Agreement are fair to Primary Bank stockholders. The opinion does
not address whether the Merger will be fair to Primary Bank stockholders as of
the date of the Primary Bank Special Meeting or the Effective Date based on any
hypothetical Granite State Trading Price.
Primary Bank retained Northeast Capital to act as its financial advisor
in connection with the Merger based upon its qualifications, experience, and
reputation, as well as upon Northeast Capital's prior investment banking
relationship and general familiarity with Primary Bank and Granite State.
Northeast Capital has previously acted as Primary Bank's financial advisor in
connection with Primary Bank's acquisition of Horizon Banks, Inc. and in
connection with several other potential acquisitions. Northeast Capital also
acted, through its wholly owned broker/dealer Northeast Capital Markets Corp.
as financial advisor and selling agent in connection with the mutual-to-stock
conversion of Peterborough Savings Bank (the predecessor entity to Primary
Bank) in October 1993. At the April 29, 1997 meeting of the Primary Bank Board,
Northeast Capital delivered a written opinion to the Primary Bank Board of
Directors that, as of such date, the proposed Exchange Ratio in the Merger was
fair from a financial point of view to the Primary Bank stockholders (other
than Granite State and its affiliates). Northeast Capital subsequently
delivered to the Primary Bank Board another written opinion dated as of the
date of this Joint Proxy Statement confirming its opinion of April 29, 1997.
The full texts of the opinion of Northeast Capital dated as of the date
of this Joint Proxy Statement, which set forth, among other things, assumptions
made, procedures followed, matters considered and limits on the review
undertaken by Northeast Capital, are attached as APPENDIX C, to this Joint
Proxy Statement. Holders of Primary Bank Common Stock are urged to read the
opinion in its entirety. Northeast Capital's opinion is addressed to the
Primary Bank Board and does not constitute a recommendation to any Primary Bank
stockholder as to how such stockholder should vote at the Primary Bank Special
Meeting. The summary set forth in this Joint Proxy Statement of the opinion of
Northeast Capital is qualified in its entirety by reference to the full text of
the opinion attached as APPENDIX C to this Joint Proxy Statement.
In arriving at its opinion dated as of the date of this Joint Proxy
Statement, among other things, Northeast Capital has: (i) reviewed Primary
Bank's Annual Reports, Forms F-2 and related audited financial information for
the three fiscal years ended December 31, 1996 and Primary Bank's related
unaudited financial information for the quarterly period ended March 31, 1997;
(ii) reviewed Granite State's Annual Reports, Forms 10-KSB and related audited
financial information for the three fiscal years ended December 31, 1996; (iii)
reviewed certain information, including financial forecasts, relating to the
business, earnings, cash flow, assets and prospects of Primary Bank and Granite
State, prepared by Primary Bank and Granite State, respectively, and furnished
to Northeast Capital by Primary Bank and Granite State, respectively; (iv)
conducted discussions with members of senior management of Primary Bank and
Granite State concerning the respective financial condition, business, earnings
and assets and management's' respective views as to the future financial
performance, growth rates, business and prospects of Primary Bank and Granite
State on both a stand-alone and a combined basis; (v) reviewed the historical
market prices and trading activity for the Primary Bank Common Stock and the
Granite State Common Stock and compared them with those of certain publicly
traded companies which Northeast Capital deemed to be relevant; (vi) compared
the respective results of operations of Primary Bank and Granite State with
those of certain publicly traded companies which Northeast Capital deemed to be
relevant; (vii) compared the proposed financial terms of the Merger with the
financial terms of certain other mergers and acquisitions which Northeast
Capital deemed to be relevant; (viii)
<PAGE> 37
analyzed, based on information provided to Northeast Capital by senior
management of Primary Bank and Granite State, the pro forma effect of the
Merger on Granite State's earnings and capitalization ratios; (ix) reviewed the
Agreement; (x) reviewed the Granite State Stock Option Agreement; and (xi)
reviewed such other financial studies and analyses and performed such other
investigations and took into account such other matters as it deemed necessary
to the rendering of its opinion.
In conducting its review and arriving at its opinion, Northeast Capital
assumed and relied upon the accuracy and completeness of all financial and
other information supplied or otherwise made available to it and did not assume
any responsibility for any independent verification of such information. With
respect to financial forecasts (including projected cost savings, revenue
enhancements, operating synergies and other possible operating and financial
benefits), Northeast Capital assumed and relied upon the senior management of
Primary Bank and Granite State as to the reasonableness and achievability of
the financial and operating forecasts and that they were reasonably prepared on
bases reflecting the best currently available estimates and judgments of
management of Primary Bank and Granite State as to the future financial
performance of Primary Bank and Granite State respectively, and Northeast
Capital assumed that such forecasts and projections would be realized in the
amounts and at the times contemplated thereby. Northeast Capital assumes no
responsibility for and expresses no view as to such forecasts and projections
or the assumptions on which they are based. Northeast Capital also assumed the
aggregate allowance for possible loan losses for Granite State and Primary Bank
were adequate to cover such losses. Northeast Capital did not make or obtain
any evaluations or appraisals of the property of Granite State or Primary Bank.
Northeast Capital did, however, examine certain individual credit files of
Granite State and independently produced projections and operating forecasts to
assure themselves that the assumptions generated by Granite State and Primary
Bank senior management did not materially and adversely alter the adequacy of
the financial consideration received by Primary Bank shareholders from a
financial point of view.
As a matter of policy, neither Primary Bank nor Granite State publicly
disclose internal management forecasts, projections or estimates of the type
furnished to Northeast Capital in connection with their analysis of the Merger,
and such forecasts, projections, and estimates were not prepared with a view
towards public disclosure. These forecasts, projections, and estimates were
based on numerous variables and assumptions which are inherently uncertain and
which may not be within the control of management, including without
limitation, general economic, regulatory and competitive positions.
Accordingly, actual results could vary materially from those set forth in such
forecasts, projections, and estimates. See "INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE."
Northeast Capital's opinions are predicated on the Merger receiving the
tax, regulatory and accounting treatment contemplated by the Agreement,
including that the Merger would be recorded as a "pooling of interests" in
accordance with generally accepted accounting principles. Northeast Capital's
opinions were necessarily based upon economic, market and other conditions as
in effect on, and the information made available to it as of, the date of such
opinions. In connection with its engagement as financial advisor and the
preparation of its opinion, Northeast Capital was not retained by Primary Bank
or the Primary Bank Board of Directors to solicit, and Northeast Capital did
not solicit, proposals from third parties for the acquisition of all or any
part of Primary Bank. No limitations were imposed by Primary Bank on the scope
of Northeast Capital's investigation or on the procedures followed by Northeast
Capital in rendering its opinion.
In connection with rendering its opinion to the Primary Bank Board,
Northeast Capital performed a variety of financial analyses in support of its
opinion which are summarized below. The summary set forth below does not
purport to be a complete description of the analyses performed by Northeast
Capital in this regard, although it describes all material analyses performed
by Northeast Capital. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
<PAGE> 38
analysis and the application of these methods to the particular circumstances,
and therefore, such an opinion is not readily susceptible to a partial analysis
or summary description. Accordingly, notwithstanding the separate factors
summarized below, Northeast Capital believes that its analyses must be
considered in their entirety and that selecting portions of its analyses and
the factors considered by it, without consideration of all factors and
analyses, could create a misleading or incorrect view of the analyses and the
processes underlying Northeast Capital's opinions. Northeast Capital arrived at
its opinion based on the results of all the analyses it undertook assessed as a
whole, and it did not draw conclusions from or with regard to any one method of
analysis. The fact that any specific analysis has been referred to in the
summary below is not meant to indicate that such analysis was given more weight
than any other analysis. With respect to the comparable company analysis, and
bank merger and acquisition transaction analyses summarized below, no public
company utilized as a comparison is identical to Primary Bank or Granite State,
no transaction is identical in nature or rationale to the contemplated
transaction between Primary Bank and Granite State and such analyses
necessarily involve complex considerations and judgments concerning the
differences in financial and operating characteristics of the companies and
other factors that could affect the acquisition or public trading values of the
companies concerned. Estimates of values of companies or assets do not purport
to be appraisals or necessarily reflect the prices at which companies or their
securities actually may be sold.
Northeast Capital's opinions are directed to the Primary Bank Board and
address only the Exchange Ratio. They do not address the underlying business
decision to proceed with the Merger and do not constitute, nor should they be
construed as, a recommendation to any Primary Bank stockholder as to how such
stockholder should vote at the Primary Bank Special Meeting or any other matter
in connection therewith.
In performing its analyses, Northeast Capital made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, all of which are beyond the control of Northeast Capital,
Primary Bank and Granite State. The analyses performed by Northeast Capital are
not necessarily indicative of actual values or actual future results, which may
be significantly more or less favorable than suggested by such analyses. In
addition, the analyses do not purport to be appraisals or to reflect the prices
at which any securities of Primary Bank or Granite State may trade at the
present time or at any time in the future. Such analyses were prepared solely
as part of Northeast Capital's analysis of the fairness of the Exchange Ratio
to the Primary Bank stockholders (other than Granite State and its affiliates)
and were provided to the Primary Bank Board of Directors in connection with the
delivery of Northeast Capital's opinions.
The following is a summary of the material analyses presented by
Northeast Capital to the Primary Bank Board of Directors in connection with its
April 29, 1997 opinion, which, as indicated above, was confirmed as of the date
hereof.
Offer Valuation. Northeast Capital reviewed the terms of the proposed
transaction, including the Exchange Ratio and the aggregate transaction value.
Northeast Capital reviewed the implied value of the consideration offered based
upon the closing share price of Granite State Common Stock on April 28, 1997
(the last trading day prior to the announcement of the Merger), which indicated
that the implied value of the consideration offered in the Granite State
proposal was approximately $25.25 per share of Primary Bank Common Stock,
representing a 16.1% premium to the April 28, 1997 Primary Bank Common Stock
closing market price of $21.75 per share (the "Primary Bank April 28 Closing
Price"), or a total transaction value of approximately $61.8 million based upon
2,448,547 fully diluted shares of Primary Bank Common Stock outstanding. In
addition, Northeast Capital reviewed the implied value of the consideration
offered based upon the closing share prices of Primary Bank Common Stock five
days and eleven days prior to the April 29, 1997 announcement date which
resulted in a premium of 24.7% to the April 24, 1997 closing market price per
share and 35.6% to the April 18, 1997 closing market price per share. Based on
the aggregate consideration offered
<PAGE> 39
using the $25.25 proposed transaction price for Primary Bank Common Stock,
Northeast Capital calculated the multiples of proposed offer value to tangible
book value per share, proposed offer value to implied core deposit premium and
proposed offer value to Primary Bank's trailing 12 month's earnings in the
contemplated transaction. This analysis resulted in the following multiples: a
proposed offer value to fully diluted tangible book value per share multiple of
1.83x; a proposed offer value to implied core deposit premium multiple of
10.81%; and a proposed offer value to Primary Bank's trailing 12 months
earnings of 17.53x. Northeast Capital also calculated the pro forma dividend
payable of $0.66 (after giving effect to Granite State's May 9, 1997 stock
split) with respect to each share of Primary Bank after giving effect of the
Merger, representing a significant increase over the current dividend of $0.00.
Pro Forma Merger Analysis. Based on projections provided by Primary Bank
and Granite State, Northeast Capital analyzed certain pro forma effects
resulting from the Merger. This analysis indicated that the transaction would
be accretive to projected EPS of Granite State Common Stock in 1997 (before the
one-time charge associated with the Merger) and 1998 and that the Merger was
dilutive to Granite State's tangible book value per share.
Contribution Analysis. Northeast Capital reviewed the relative
contributions to be made by Primary Bank and Granite State to the combined
entity. The financial and operating information reviewed in such analysis
included pro forma earnings, total assets, total loans, tangible equity, and
deposits contributed. Northeast Capital also analyzed the pro forma ownership
of the combined entity. This analysis showed that, while the Primary Bank
Stockholders would own approximately 54.1% of the outstanding shares of the
combined entity based upon the Exchange Ratio, Primary Bank was contributing
44.2% of pro forma earnings (excludes savings from transaction while tax
adjusting earnings), 54.1% of total assets, 52.3% of total loans, 50.3% of
total equity, and 50.3% of total deposits.
Discounted Dividend Stream Analysis. Using a discounted dividend stream
analysis, Northeast Capital estimated the present value of the future streams
of after-tax cash flows that Primary Bank could produce on a stand-alone basis
from 1997 through 2001 and distribute to stockholders ("Dividendable Net
Income"). In this analysis, Northeast Capital assumed that Primary Bank
performed in accordance with the earnings forecasts provided to Northeast
Capital by Primary Bank's senior management and, assuming a 3.5% annual growth
rate on deposits and loans, projected the after-tax cash flows. Northeast
Capital calculated the sum of (i) the terminal values per share of Primary Bank
Common Stock based on an assumed multiple of Primary Bank's projected 2002 net
income of 17.0x plus (ii) the projected 1997-2001 five-year after-tax cash
flows per share, in each case, discounted to present values at assumed discount
rates ranging from 12.5% to 15.0%. This discounted dividend stream analysis
indicated a reference range of $23.44 to $29.40 per share of Primary Bank
Common Stock.
Northeast Capital also estimated the present value of the after-tax cash
flows that Granite State could produce on a stand-alone basis from 1997 through
2001. In this analysis, Northeast Capital assumed that Granite State performed
in accordance with the earnings forecasts provided to Northeast Capital by
Granite State's senior management. Northeast Capital calculated the sum of (i)
the terminal values per share of Granite State Common Stock based on an assumed
multiple of Granite State's projected 2002 net income of 12.0x plus (ii) the
projected 1997-2001 five-year after-tax cash flow per share, in each case,
discounted to present values at an assumed discount rate of 12.5% and 15.0%.
This discounted dividend stream analysis indicated a reference range of $16.03
to $17.73 per share (as adjusted to give effect to Granite State's May 9, 1997
stock split) of Granite State Common Stock.
Analysis of Selected Acquisition Transactions. Northeast Capital reviewed
publicly available information regarding transactions involving the acquisition
of banks and thrifts in New England with a value
<PAGE> 40
of between $25 and $75 million which had occurred since April 1, 1995. Based
upon a review of these selected acquisition transactions, Northeast Capital
determined that the relevant range of tangible book multiples were 173.9% to
178.3%, the relevant range of trailing 12 months EPS multiples were 15.25x to
17.45x and the relevant range of tangible book premium to core deposits
multiple were 8.58% to 9.29%. Northeast Capital then calculated the implied
multiples for Primary Bank based on the proposed offer value, resulting in a
tangible book multiple of 183.0%, a trailing 12 months EPS multiple of 17.53x
(before taxes and 23.15x tax adjusted earnings) and a tangible book premium to
core deposits multiple of 10.81%.
No company or transaction used in the above analysis as a comparison is
identical to Primary Bank, Granite State or the contemplated transaction.
Accordingly, an analysis of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the value
of the companies to which they are being compared. Mathematical analysis (such
as determining the mean or median) is not, in itself, a meaningful method of
using comparable company data.
Comparison of Selected Companies. Northeast Capital reviewed and compared
certain financial information, ratios, and public market multiples relating to
Primary Bank to the publicly available corresponding data compiled by Northeast
Capital for a group of nine selected banks with similar asset size, New England
location, and comparable loan mix which Northeast Capital deemed to be relevant
(collectively, the "Primary Bank Selected Companies"). Based upon a review of
such information of the Primary Bank Selected Companies, Northeast Capital
determined: (i) the relevant range based on the median and mean for trailing 12
months EPS multiples (after tax) for the Primary Bank Selected Companies to be
12.87 to 12.99x, respectively, resulting in an implied valuation range for
Primary Bank of $13.72 to $13.85 per share; (ii) the relevant range based on
the median and mean tangible book value multiples for the Primary Bank Selected
Companies to be 161.47% and 163.00%, respectively, resulting in an implied
valuation range for Primary Bank of $22.27 to $22.48 per share; (iii) the
relevant range based on the median and mean market capitalization to deposits
multiples for Primary Bank Selected Companies to be 15.71% to 15.67%,
respectively, resulting in an implied valuation range for Primary Bank of
$23.20 to $23.14 per share. Northeast Capital further observed that if an
assumed premium of 20% to 30% were applied to the implied valuation ranges to
give effect to a hypothetical merger transaction, the resulting implied
valuation ranges for Primary Bank would be as follows: a range of $16.46 to
$17.84 per share based on trailing 12 months EPS multiples (after tax); a range
of $27.07 to $29.60 per share based on tangible book value and a range of
$27.84 to $30.16 per share based on market capitalization to deposits multiple.
Northeast Capital also reviewed and compared certain financial
information, ratios, and public market multiples relating to Granite State to
the publicly available corresponding data for a selected group of thirteen
banks and thrifts in New England whose assets are $200 million to $600 million
with similar loan portfolio composition to Granite State which Northeast
Capital deemed to be relevant (collectively, the "Granite State Selected
Companies"). Based on a review of such information for the Granite State
Selected Companies, Northeast Capital determined: (i) the relevant range based
on the median and mean for trailing 12 months EPS multiples for the Granite
State Selected Companies to be 11.18 to 11.91x, respectively, resulting in an
implied valuation range for Granite State of $17.33 to $18.46 per share
(adjusted); (ii) the relevant range based on the median and mean tangible book
value multiples for the Granite State Selected Companies to be 135.14% and
141.99%, respectively, resulting in an implied valuation range for Granite
State of $13.51 to $14.20 per share (adjusted); (iii) the relevant range based
on the median and mean market capitalization to deposits multiples for Granite
State Selected Companies to be 14.11% to 14.60%, respectively, resulting in an
implied valuation range for Granite State of $14.80 to $15.31 per share
(adjusted).
<PAGE> 41
In connection with its opinion dated the date of this Joint Proxy
Statement, Northeast Capital performed procedures to update, as necessary,
certain of the analyses described above and reviewed the assumptions on which
such analyses described above were based and the factors considered in
connection therewith. Northeast Capital did not perform any analyses in
addition to those described in updating its April 29, 1997 opinion. Northeast
Capital has been retained by the Primary Bank Board of Directors to act as
financial advisor to Primary Bank with respect to the Merger and will receive a
fee for its services. Northeast Capital is an investment banking firm which,
among other things, regularly engages in the valuation of businesses and
securities, including banking institutions, in connection with mergers and
acquisitions. Northeast Capital has in the past four years provided financial
advisory, investment banking and other services to Primary Bank and has
received customary fees for the rendering of such services. In addition, in the
ordinary course of its securities business, Northeast Capital or its affiliates
may trade debt and/or equity securities of Primary Bank and Granite State for
its own account and Northeast Capital, therefore, may from time to time hold a
long or short position in such securities.
Northeast Capital had been engaged previously (at least 18 months prior
to the presentation to the Primary Bank Board of Directors on April 28, 1997)
to provide services to Granite State unrelated to the Merger. The total
consideration paid to Northeast Capital by Granite State for these services was
approximately $12,500, representing compensation for merger and acquisition
advisory work in connection with a specific transaction.
Primary Bank and Northeast Capital executed an engagement agreement dated
December 12, 1996, providing for the retention by Primary Bank of Northeast
Capital as its financial advisor. Northeast Capital received a retainer fee of
$25,000. The engagement letter provides that in the event Primary Bank enters
into a merger agreement, Northeast Capital will receive a success fee based on
the purchase price. In addition, the engagement agreement provides that Primary
Bank will pay Northeast Capital $50,000 for a fairness opinion which is not
subject to consummation, if requested by Primary Bank, and reimburse Northeast
Capital for out-of-pocket expenses. Based upon an Exchange Ratio of 1.4926 and
a Granite State Trading Price of $16.92, the aggregate fee payable to Northeast
Capital is estimated to be $768,000, $409,000 of which has been paid to date.
Primary Bank has also agreed to indemnify Northeast Capital and its officers,
directors, agents and employees against any losses, claims, damages,
liabilities or expenses related to such engagement.
EFFECTIVE DATE OF THE MERGER
Articles of merger evidencing the transactions contemplated herein shall
be delivered to the New Hampshire Secretary of State in accordance with
applicable New Hampshire law. The time and date of the completion of the Merger
(the "Effective Date") shall be the time and date specified as the effective
date in such certificates or articles of merger. The Effective Date shall be no
later than thirty days after the last condition precedent pursuant to the
Agreement has been fulfilled or waived, or such other date as Granite State and
Primary Bank shall agree.
Granite State and Primary Bank believe that the Merger will be completed
within 60 days of the Special Meetings, although there can be no assurances in
this regard. The Agreement provides that if the Merger has not been completed
on or before February 28, 1998, then in certain circumstances Granite State or
Primary Bank may terminate the Agreement. See "Termination; Effect of
Termination."
EXCHANGE OF PRIMARY BANK STOCK CERTIFICATES
The conversion of Primary Bank Common Stock into Granite State Common
Stock will occur automatically at the Effective Date. As soon as practicable
after the Effective Date, Granite State, or a bank
<PAGE> 42
or trust company designated by Granite State, in the capacity of exchange agent
(the "Exchange Agent"), will send a transmittal form to each Primary Bank
stockholder. The transmittal form will contain instructions with respect to the
surrender of certificates representing Primary Bank Common Stock to be
exchanged for Granite State Common Stock.
PRIMARY BANK STOCKHOLDERS SHOULD NOT FORWARD PRIMARY BANK STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
PRIMARY BANK STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE
ENCLOSED PROXY CARD.
Until the certificates representing Primary Bank Common Stock are
surrendered for exchange after completion of the Merger, holders of such
certificates will not receive, and will not be paid dividends on, the Granite
State Common Stock into which such shares have been converted. When such
certificates are surrendered, any unpaid dividends will be paid without
interest. For all other purposes, however, each certificate which represents
shares of Primary Bank Common Stock outstanding at the Effective Date will be
deemed to evidence ownership of the shares of Granite State Common Stock into
which those shares have been converted by virtue of the Merger.
All shares of Granite State Common Stock issued upon conversion of shares
of Primary Bank Common Stock shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Primary Bank Common
Stock, subject, however, to Granite State's obligation to pay any dividends or
make any other distributions with a record date on or prior to the Effective
Date, which may have been declared or made by Primary Bank on such shares of
Primary Bank Common Stock in accordance with the Agreement and which remain
unpaid at the Effective Date.
No fractional shares of Granite State Common Stock will be issued to any
Primary Bank stockholder upon completion of the Merger. For each fractional
share that would otherwise be issued, Granite State will pay by check an amount
equal to the product obtained by multiplying the fractional share interest to
which such holder would otherwise be entitled by the Granite State Trading
Price.
Neither Granite State nor Primary Bank will be liable to any holder of
shares of Primary Bank Common Stock which are converted into shares of Granite
State Common Stock in the Merger for any such shares of Granite State Common
Stock (or dividends, distributions or net sale proceeds with respect thereto)
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
CONDITIONS TO THE MERGER
The obligations of Granite State and Primary Bank to consummate the
Merger are subject to the satisfaction or mutual waiver at or prior to the
Effective Date of the following conditions, among others: (a) the taking of all
required corporate action; (b) the receipt of all required approvals of the
Merger by regulatory authorities without the imposition of unduly burdensome
conditions (provided that for such purposes a condition to any regulatory
approval that requires Granite State to divest its Peterborough, New Hampshire
branch shall not be deemed unduly burdensome), and the expiration or
termination of all notice and waiting periods required thereunder; (c) that
there is no order in effect that enjoins or prohibits consummation of the
Merger; (d) that since December 31, 1996, there shall not have occurred any
"material adverse effect" (as defined in the Agreement) on the assets,
financial condition or results of operations of Granite State or Primary Bank;
(e) the receipt of opinions of counsel in form and substance reasonably
satisfactory to Granite State and Primary Bank; (f) all required approvals by
state securities authorities with respect to the transactions contemplated by
the Agreement, shall have been obtained; (g) the receipt of an opinion of Luse
Lehman
<PAGE> 43
Gorman Pomerenk & Schick, P.C. that, among other things, the Merger will be
treated for federal income tax purposes as a "reorganization" within the
meaning of the Internal Revenue Code of 1986, as amended (the "Code") (see
"Certain Federal Income Tax Consequences") herein; (h) the approval of the
Agreement by the stockholders of Granite State and Primary Bank; (i) the
receipt by Primary Bank of a written opinion from its financial advisor to the
effect that the consideration to be received by stockholders of Primary Bank
pursuant to the Agreement is fair, from a financial point of view, to such
stockholders, and the receipt by Granite State of a written opinion from its
financial advisor to the effect that the Merger is fair to Granite State
stockholders; (j) the shares of Granite State Common Stock which shall be
issued to the stockholders of Primary Bank upon consummation of the Merger
shall have been authorized for listing on the Nasdaq National Market System.
The obligations of Granite State under the Agreement shall be subject to
satisfaction of each of the following additional conditions; (a) the receipt of
(i) an opinion from Granite State's independent auditor to the effect that the
merger will be treated as a "pooling of interests," as defined by generally
accepted accounting principles, for financial accounting purposes and (ii) a
letter, in a form satisfactory to Granite State's independent auditor, from
Primary Bank representing to Granite State that Primary Bank has not entered
into any transaction or is aware of any events or circumstances that would
preclude the Merger from being treated as a "pooling of interests" for
financial accounting purposes and (iii) a letter, in a form satisfactory to
Granite State's independent auditor, from Primary Bank's independent auditor
representing that they are not aware of any transactions or of any events or
circumstances that would preclude the Merger from being treated as a "pooling
of interests" for financial accounting purposes; (b) that the Merger shall not
require Granite State or Primary Bank to distribute to depositors the
liquidation account established by Primary Bank in connection with its
mutual-to-stock conversion.
At any time prior to the Effective Date, the parties may waive compliance
with any of the conditions set forth in the Agreement if such waiver is set
forth in writing and is signed by a duly authorized officer on behalf of the
waiving party.
REGULATORY AND OTHER APPROVALS
The Merger is subject to the approval of the FDIC under the Bank Merger
Act, which requires that the FDIC take into consideration the financial and
managerial resources and future prospects of the existing and proposed
institutions and the convenience and needs of the communities to be served. The
Bank Merger Act prohibits the FDIC from approving the Merger if it would
violate certain antitrust standards, unless it finds that the anticompetitive
effect of the Merger is clearly outweighed in the public interest by the
probable effect of the transaction in meeting the convenience and needs of the
communities to be served. In addition, the FDIC must take into account the
parties' record of performance in meeting the credit needs of the entire
community, including low and moderate-income neighborhoods. FDIC regulations
require publication of notice of the application for approval of the Merger and
provide an opportunity for the public to comment on the application in writing
and to request a hearing. The Merger may not be consummated until at least the
15th day after such approval, during which time the United States Department of
Justice ("DOJ" ) may challenge the Merger on antitrust grounds.
In addition, the Merger requires the approval of the Bank Commissioner
following a public hearing at which any interested person may appear. The Bank
Commissioner's approval is based upon a determination that the public
convenience and advantage and the interest of the merging institutions and
their stockholders and depositors will be promoted by the Merger and that the
Merger can be effected without reducing the amount standing to the credit of
any depositor and without the necessity of imposing restrictions (other than
restrictions already in effect under applicable state and federal laws and
regulations) on the withdrawal of funds by depositors.
<PAGE> 44
The approval of the Bank Commissioner is also required for Granite Bank
to continue to operate the existing branch offices of Primary Bank as branch
offices of Granite Bank following the Merger. The Bank Commissioner may not
approve Granite Bank's request to retain the Primary Bank branch offices if, at
the time Granite Bank's request is filed, the dollar volume of Granite Bank's
total deposits exceeds a certain percentage of the dollar volume of the total
deposits of all banks and thrifts in New Hampshire. In evaluating such a
request, the Bank Commissioner also must consider the convenience, needs and
welfare of the communities and area concerned, the financial history and
condition of Granite Bank and Primary Bank, including their capital adequacy,
the future prospects of Granite Bank, the character of Granite Bank's
management and whether or not the retention of the Primary Bank branches would
expand the size of Granite Bank and the extent of its business beyond limits
consistent with adequate and sound banking, the public interest and the
preservation of competition in banking.
Although the shares issuable upon exercise of the Option represent
approximately 12.9% of the Primary Bank Common Stock outstanding, Granite State
may not exercise the Option or acquire more than 5% of Primary Bank Common
Stock, pursuant to the exercise of the Option or otherwise, without prior
approval of the Board of Governors of the Federal Reserve System ("Federal
Reserve") under the BHCA. Granite State has no present intention of seeking
such approval absent the occurrence of a triggering event under the Stock
Option Agreement.
To the extent that the foregoing information describes statutes and
regulations, it is qualified in its entirety by reference to the particular
statutes and regulations and the regulations promulgated under such statutes.
The parties have filed applications for the regulatory approvals required
for consummation of the Merger. The Merger and/or the exercise of the Option
will not proceed in the absence of all such required approvals. There can be no
assurance that the FDIC or the Bank Commissioner will approve the Merger and
Granite State's retention of Primary Bank's branch offices and, if approved,
there can be no assurance as to the date of such approvals, that such approvals
will not be conditioned upon matters that would cause the Board of Directors of
Granite State or Primary Bank to abandon the Merger, or that no action will be
brought by DOJ challenging the Merger. See "--Representations and Warranties,"
"--Conditions to the Merger," "--Amendments, Extensions and Waivers" and
"--Effective Date of the Merger; Termination."
Granite State and Primary Bank are not aware of any other governmental
approvals or actions that are required for consummation of the Merger except as
described above. Should any such approval or action be required, it is
presently contemplated that such approval or action would be sought. There can
be no assurance that any such approval or action, if needed, could be obtained,
would not delay consummation of the Merger and would not be conditioned in a
manner that would cause Granite State or Primary Bank to abandon the Merger.
REPRESENTATIONS AND WARRANTIES
The Agreement contains customary representations and warranties relating
to, among other things, (a) the corporate organization of Granite State,
Granite Bank and Primary Bank; (b) the capital structures of Granite State and
Primary Bank; (c) the due authorization, execution, delivery, performance and
enforceability of the Agreement; (d) consents or approvals of regulatory
authorities or third parties necessary to complete the Merger; (e) the
consistency of financial statements with generally accepted accounting
principles and, where appropriate, applicable regulatory accounting principles;
(f) the absence of material adverse effects since December 31, 1996, in the
consolidated assets, business, financial condition or results of operations of
Granite State or Primary; (g) the filing of tax returns and payment of taxes;
(h) the absence of undisclosed material
<PAGE> 45
pending or threatened litigation; (i) compliance with applicable laws and
regulations; (j) retirement and other employee plans and matters relating to
the Employee Retirement Income Security Act of 1974 ("ERISA"); (k) the quality
of title to assets and properties; (1) the maintenance of adequate insurance;
(m) the absence of undisclosed brokers' or finders' fees; (n) the absence of
material environmental violations, actions or liabilities; (o) the consistency
of the allowance for loan losses with generally accepted accounting principles
and all applicable regulatory criteria; (p) the accuracy of information
supplied by Granite State and Primary Bank in connection with this Joint Proxy
Statement and all applications filed with regulatory authorities for approval
of the Merger; and (q) documents filed with the Commission and the accuracy of
information contained therein.
The Agreement also contains other representations and warranties by
Primary Bank relating to, among other things, certain contracts relating to
employment, consulting and benefits matters, and transactions with affiliates.
BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, Granite State and Primary Bank have
each agreed to use their best efforts to preserve their business organizations
intact, to maintain good relationships with employees and to preserve the
goodwill of customers and others with whom business relationships exist. In
addition, Primary Bank has agreed to conduct its business and to engage in
transactions only in the ordinary course of business, consistent with past
practice, except as otherwise required by the Agreement or with the written
consent of Granite State.
In addition, Primary Bank has agreed in the Agreement that it may not,
without the written consent of Granite State, among other things: (i) amend or
change its Articles of Agreement or Bylaws; (ii) change the number of
authorized or issued shares of its capital stock or issue or grant any option
or similar right relating to its capital stock or split, combine or reclassify
any shares of capital stock, or declare or pay any dividend or other
distribution in respect of capital stock, or redeem or otherwise acquire any
shares of capital stock, except for shares of Primary Bank Common Stock that
may be issued upon the exercise of options identified in the Agreement as
outstanding as of the date of the Agreement; (iii) except pursuant to the
arrangements identified in the Agreement, grant any severance or termination
pay to, or enter into any new or amend any existing employment Agreement with,
or increase the compensation of (except for normal increases in the ordinary
course of business consistent with past practice), any employee, officer or
director of Primary Bank, except that Primary Bank may enter into severance
arrangements with employees or officers of Primary Bank in connection with
employment terminations to result from the Merger the total cost of which shall
not exceed $600,000; (iv) engage in any merger, acquisition or similar
transaction; (v) sell or dispose of any capital stock or assets other than in
the ordinary course of business; (vi) take any action which would result in any
of its representations and warranties becoming untrue as of a later date; (vii)
change any accounting practices; (viii) waive, grant or transfer any material
rights of value or materially modify or change any existing material agreement
or indebtedness other than in the ordinary course of business, consistent with
past practice; (ix) implement any new employee plan, or materially amend any
existing plan except to the extent such amendments do not result in an increase
in cost, or contribute to any employee benefit plan other than in amounts and
in a manner consistent with past practice; (x) purchase any security for its
investment portfolio not rated "A" or higher by either Standard & Poor's
Corporation or Moody's Investor Services, Inc.; (xi) fail to review with a
representative of Granite State proposed loans or commitments other than one-
to four-family residential real estate loans, in excess of $350,000, or any
renewal or modification of any existing loan or commitment outstanding in
excess of $350,000; (xii) except as set forth in the Agreement, enter into or
modify any other transaction with any affiliate; (xiii) enter into any interest
rate swap or similar arrangement; (xiv) take any action that would give rise to
a right of payment to any individual under any employment agreement; (xv)
intentionally and knowingly take any action that would preclude satisfaction of
the condition to closing
<PAGE> 46
contained in the Agreement relating to the financial accounting treatment of
the Merger; or (xvi) change its material banking policies in any material
respect except as may be required by changes in applicable law or regulations
or in response to examination comments by a regulatory authority.
Under the Agreement, unless provided for in a business plan or similar
document, it shall not be considered in the ordinary course of business for
Primary Bank to do any of the following: (i) make any capital expenditure of
$50,000 or more not disclosed in the Agreement, without the prior written
consent of Granite State; (ii) except as set forth in the Agreement, make any
disposition of any assets having a book or market value in excess of $1.0
million, other than certain transactions made in the ordinary course of
business; or (iii) enter into any commitment, other than in the normal course
of business, involving a payment by Primary Bank of more than $50,000 annually,
or containing a material financial commitment and extending beyond 12 months
from the date of the Agreement.
NO SOLICITATION OF BIDS
The Agreement required Primary Bank to terminate any discussions or
negotiations with any parties with respect to any Superior Acquisition
Proposal. The Agreement also requires Primary Bank to use all reasonable
efforts to cause its directors, officers, employees, agents and representatives
not to solicit any inquiries or offers with respect to an acquisition proposal,
or engage in any discussions or negotiations with any person relating to an
acquisition proposal, although in certain circumstances the Board of Directors
of Primary Bank may furnish information to any third party and may participate
in discussions and negotiations with such third party if, after having
considered the written advice of counsel to Primary Bank, the Board has
determined that there is a reasonable basis to conclude that the failure to
provide such information or participate in such other negotiations would
constitute a breach of their fiduciary duties under New Hampshire law. If any
such inquiries or proposals are received, Primary Bank is required to
immediately notify Granite State. See "CERTAIN RELATED TRANSACTIONS--Stock
Option Agreement."
The directors and executive officers of Primary Bank have executed a
letter agreement containing provisions similar to those described above
relating to Primary Bank, and such directors and executive officers have also
agreed to vote all shares of Primary Bank Common Stock owned by them in favor
of the Agreement. A copy of the form of Affiliate Agreement executed by the
directors and executive officers of Primary Bank is included as EXHIBIT 2 to
the Agreement attached hereto as APPENDIX A.
AMENDMENTS, EXTENSIONS AND WAIVERS
Subject to applicable law, at any time prior to the consummation of the
transactions contemplated by the Agreement, the parties may (a) amend the
Agreement, (b) extend the time for the performance of any of the obligations
under the Agreement, (c) waive any inaccuracies in the representations and
warranties contained therein or in any document delivered pursuant thereto, or
(d) waive compliance with any of the agreements or conditions contained in the
Agreement. The Agreement may not be amended except by an instrument in writing
authorized by the respective Boards of Directors and signed, by duly authorized
officers, on behalf of the parties hereto. Any agreement to any extension or
waiver must be set forth in writing and must be signed by a duly authorized
officer.
TERMINATION; EFFECT OF TERMINATION
The Agreement may be terminated on or at any time prior to the Closing
Date by the mutual written consent of the parties to the Agreement. In
addition, the Agreement may be terminated by Granite State or Primary Bank: (i)
if there is any breach of any representation, warranty, covenant or other
obligation that
<PAGE> 47
results in a "material adverse effect" (as defined in the Agreement) to the
breaching party, and such breach is not remedied within 30 days after receipt
of a written notice requesting that it be remedied; (ii) if the Closing Date
shall not have occurred on or before February 28, 1998, unless the failure to
close is due to the failure of the party seeking to terminate the Agreement to
perform or observe its agreements under the Agreement; or (iii) if either party
has been informed in writing by a regulatory authority whose approval or
consent has been requested that such approval or consent is unlikely to be
granted (except any approval or consent conditioned upon divestiture of the
Peterborough branch of Granite Bank), unless the failure to receive such
approval is due to the failure of the party seeking to terminate the Agreement
to perform or observe its agreements under the Agreement; or (iv) by either
Granite State or Primary Bank if any approval of the stockholders of Granite
State or Primary Bank required for the consummation of the Merger shall not
have been obtained.
In addition, Primary Bank may terminate the Agreement: (i) if on the
Closing Date the Granite State Trading Price shall be less than $13.533; (ii)
if it enters into an agreement relating to a Superior Acquisition Proposal,
provided that Primary Bank has not solicited such proposal in violation of the
Agreement; or (iii) following a vote by the Primary Bank Board of Directors to
withdraw its recommendation of approval of the Merger to the Primary Bank
stockholders if such Board of Directors, after having considered the written
advice of its counsel, has determined that there is a reasonable basis to
conclude that to recommend approval would constitute a breach of the fiduciary
duties of such directors under New Hampshire law, and such withdrawal will not
constitute a breach of the Agreement.
If the Agreement is terminated it shall generally become void, and there
shall be no further liability on the part of Granite State or Primary Bank to
the other, except for any liability arising out of any uncured willful breach
of any covenant or other provision of the Agreement or any fraudulent breach of
a representation or warranty. In the event of any termination of the Agreement
by Primary Bank based on a breach of a representation, warranty or covenant by
Granite State that is caused by the willful misconduct or gross negligence of
Granite State, Granite State shall pay Primary Bank for all out-of-pocket costs
and expenses, including reasonable legal, accounting and investment banking
fees and expenses, incurred by Primary Bank in connection with the entering
into the Agreement and the carrying out of any and all acts contemplated
thereunder up to a maximum of $584,000.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Officers. On the Effective Date, Mr. Christopher J. Flynn, if he is the
President and Chief Executive Officer of Primary Bank at such time, shall
become the President of Granite Bank, and Mr. Charles P. Monaghan, if he is a
Senior Vice President of Primary Bank at such time, shall become a Senior Vice
President of Granite Bank. If the Effective Date occurs in calendar year 1997,
Messrs. Flynn and Monaghan shall be entitled to participate in the Granite Bank
senior officer incentive compensation bonus plan for 1997 on the same basis as
other senior officers of Granite Bank.
Mr. Flynn shall be offered a three-year employment Agreement with Granite
Bank on terms no less favorable than the contract between Primary Bank and Mr.
Flynn in effect as of the date of the Agreement, and which shall provide that
Mr. Flynn is not entitled to any payments under his employment agreement in
effect as of the date thereof as a result of the Merger. Upon the Effective
Date, Mr. Flynn shall be granted an incentive stock option by Granite State to
purchase 5,000 shares of Granite State Common Stock at an exercise price equal
to the Granite State Trading Price, which option shall be exercisable in equal
instalments over a five-year period and which shall vest immediately upon a
change in control of Granite State. In addition, Mr. Flynn will be entitled to
participate in a Supplemental Executive Retirement Plan that will provide him
with benefits to which he would have been entitled under any tax qualified
employee pension plan sponsored by Granite Bank but for certain limitations
imposed by the Code.
<PAGE> 48
Mr. Monaghan shall be offered an employment agreement substantially
equivalent to the contract between Primary Bank and Mr. Monaghan in effect as
of the date of the Agreement, which employment agreement shall terminate two
years from the Effective Date, shall provide a severance payment upon
termination equal to two year's salary, and which shall provide that no
payments thereunder (or under the existing employment and special termination
agreement between Primary Bank and Mr. Monaghan) are due Mr. Monaghan as a
result of the Merger. Upon the Effective Date, Mr. Monaghan shall also be
provided a special termination agreement substantially in the form currently
provided to the executive officers of Granite State.
Directors. On the Effective Date, those persons serving as directors of
Granite Bank immediately prior to the Effective Date will continue to serve as
directors together with four directors to be designated by Primary Bank (one of
whom shall be Mr. Flynn) subject to Granite State's and Granite Bank's
approval, and those persons serving as directors of Granite State immediately
prior to the Effective Date will continue to serve as directors together with
three directors to be designated by Primary Bank (one of whom shall be Mr.
Flynn) subject to Granite State's approval.
Operations Prior to and After the Merger. Pursuant to the Merger
Agreement, Granite State and Primary Bank have each agreed to use their best
efforts to preserve their business organizations intact, to maintain good
relationships with employees and to preserve the goodwill of customers and
others with whom business relationships exist. In addition, Primary Bank has
agreed to conduct its business and to engage in transactions only in the
ordinary course of business, consistent with past practice, except as otherwise
required by the Agreement or with the written consent of Granite State. As of
the date of this Joint Proxy Statement, Granite State's intentions are to
continue to operate all Primary Bank offices as branches of Granite Bank,
although there can be no assurances in this regard, and Granite State and
Granite Bank may determine, or be required by regulators because of the
competitive effect of the Merger, to close, consolidate or divest one or more
branches of Primary Bank or Granite Bank. See "Conditions to the Merger."
EMPLOYEE BENEFITS
On and after the Effective Date the employee benefit plans of Granite
State and Primary Bank may, at Granite State's election, continue to be
maintained separately or consolidated. In the event of a consolidation of any
or all of such plans, Primary Bank employees shall receive credit for service
with Primary Bank under any Granite State benefit plan, or new Granite State
benefit plan in which such employees would be eligible to enroll for purposes
of eligibility and vesting determination. Employees of Primary Bank, as
specified in the Agreement, shall be entitled to pro rata bonus payments under
the Primary Bank bonus or incentive plan in effect on the date of the Agreement
in amounts accrued by Primary Bank through the Effective Date and consistent
with past practice.
ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling of interests" for
accounting and financial reporting purposes. Under this method of accounting,
the recorded assets and liabilities of Granite State and Primary Bank will be
carried forward to the combined corporation at their recorded amounts; earnings
of the combined corporation will include earnings of both Granite State and
Primary Bank for the entire fiscal year of Granite State in which the Merger
occurs; and the reported earnings of the separate corporations for prior
periods will be combined and restated as earnings of the combined corporation.
Expenses incurred in connection with the Merger will constitute expenses for
the accounting periods to which such expenses relate. The receipt of a letter
from Granite State's independent auditors confirming that the Merger will
qualify for "pooling of interests" accounting is a condition to Granite State's
obligation to complete the Merger.
<PAGE> 49
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Completion of the Merger is conditioned upon there being delivered to
Granite State and to Primary Bank an opinion of Luse Lehman Gorman Pomerenk &
Schick, P.C., counsel to Granite State, that for federal income tax purposes,
under current law, assuming that the Merger and related transactions will take
place as described in the Agreement, among other things, the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code,
and Granite State and Primary Bank will each be a party to the reorganization
within the meaning of Code Section 368(b).
In that case, in the opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C., the following would be the material federal income tax consequences of
the Merger: (i) no gain or loss will be recognized by Granite State or Primary
Bank in the Merger; (ii) no gain or loss will be recognized by holders of
shares of Primary Bank Common Stock upon their receipt of Granite State Common
Stock in exchange for their Primary Bank Common Stock, except that stockholders
who receive cash proceeds for fractional interests in Granite State Common
Stock will recognize gain or loss equal to the difference between such proceeds
and the tax basis allocated to their fractional share interests, and such gain
or loss will constitute capital gain or loss if their Primary Bank Common Stock
is held as a capital asset at the Effective Date; (iii) the tax basis of the
shares of Granite State Common Stock (including fractional share interests)
received by the stockholders of Primary Bank will be the same as the tax basis
of their Primary Bank Common Stock exchanged therefor; and (iv) the holding
period of the Granite State Common Stock in the hands of the Primary Bank
stockholders will include the holding period of their Primary Bank Common Stock
exchanged therefor, provided such Primary Bank Common Stock is held as a
capital asset at the Effective Date.
Under the Merger Agreement, the condition that Luse Lehman Gorman
Pomerenk & Schick, P.C. deliver the opinion described above can be waived by
Granite State and Primary Bank. However, in the event that the delivery of such
opinion of counsel is waived, or such opinion would otherwise set forth tax
consequences materially different to a stockholder than those described above,
Granite State and Primary Bank intend to resolicit proxies as required in
accordance with the rules and regulations of the Securities and Exchange
Commission and the FDIC.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY
AND IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND
PROPOSED TREASURY REGULATIONS THEREUNDER, AND CURRENT ADMINISTRATIVE RULINGS
AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH
CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. THE DISCUSSION
IS NOT A COMPLETE DESCRIPTION OF ALL THE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER AND, IN PARTICULAR, DOES NOT ADDRESS TAX CONSIDERATIONS THAT MAY AFFECT
THE TREATMENT OF STOCKHOLDERS WHO ACQUIRED THEIR PRIMARY BANK COMMON STOCK
PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS
COMPENSATION, OR STOCKHOLDERS WHICH ARE EXEMPT ORGANIZATIONS OR WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES. EACH STOCKHOLDER'S INDIVIDUAL
CIRCUMSTANCES MAY AFFECT THE TAX CONSEQUENCES OF THE MERGER TO SUCH
STOCKHOLDER. IN ADDITION, NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO THE
TAX CONSEQUENCES OF THE MERGER UNDER APPLICABLE STATE, LOCAL, OR FOREIGN LAWS.
ACCORDINGLY, EACH PRIMARY BANK STOCKHOLDER IS ADVISED TO CONSULT A TAX ADVISOR
AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER.
<PAGE> 50
EXPENSES
Each party to the Agreement will pay all costs and expenses incurred by
it in connection with the Merger, including fees and expenses of its own
financial consultants, accountants and counsel, except for the cost of printing
and mailing the Joint Proxy Statement which will be shared equally.
In the event of any termination of the Agreement by Primary Bank based on
a breach of a representation, warranty or covenant by Granite State that is
caused by the willful misconduct or gross negligence of Granite State, Granite
State shall pay Primary Bank for all out-of-pocket costs and expenses,
including reasonable legal, accounting and investment banking fees and
expenses, incurred by Primary Bank in connection with the entering into the
Agreement and the carrying out of any and all acts contemplated thereunder up
to a maximum of $584,000. See "--Termination; Effect of Termination."
EXEMPTION FROM REGISTRATION
The shares of Granite State Common Stock that will be issued to Primary
Bank's stockholders in the Merger will not be registered with the Commission
under the Securities Act in reliance upon the exemption from registration
afforded by Section 3(a)(10) thereof. Section 3(a)(10) exempts from the
registration requirements of the Securities Act any security which is issued in
exchange for one or more bona fide outstanding securities, claims or property
interests or partly in such exchange and part for cash where the terms and
conditions of such issuance and exchange are approved, after a hearing upon the
fairness of such terms and conditions at which all persons to whom it is
proposed to issue securities in such exchange shall have the right to appear,
by any court or by any official or agency of the United States or by any State
or Territorial banking or insurance commission or other governmental authority
expressly authorized by law to grant such approval.
Granite State has filed a petition with the Bank Commissioner for
approval of the Merger under Chapter 388. Chapter 388 authorizes the merger and
consolidation of New Hampshire-chartered mutual savings banks, trust and
banking companies, and other savings banks upon petition to the Bank
Commissioner. Chapter 388 requires that notice of a proposed transaction be
provided to all depositors of the affected banks and that the Bank Commissioner
conduct a public hearing on the transaction which all stockholders of the banks
may attend. THE BANK COMMISSIONER'S HEARING ON THE MERGER WILL TAKE PLACE ON
AUGUST 25, 1997 AT 10:00 A. M. AND WILL BE HELD AT THE BANK COMMISSIONER'S
OFFICES AT 169 MANCHESTER STREET, CONCORD, NEW HAMPSHIRE. ANY PERSON INTERESTED
IN THE MERGER, INCLUDING ANY INTERESTED PRIMARY BANK STOCKHOLDER, MAY ATTEND
THE HEARING. PERSONS WHO ATTEND THE HEARING WILL BE ALLOWED TO SPEAK ON THE
MERGER AND ANY PERSON MAY SUBMIT WRITTEN COMMENTS TO THE BANK COMMISSIONER
REGARDING THE MERGER. THERE ARE NO PREREQUISITES OR PRECONDITIONS TO YOUR
ATTENDING THE HEARING OR SUBMITTING WRITTEN COMMENTS ON THE MERGER TO THE BANK
COMMISSIONER. WRITTEN COMMENTS ON THE MERGER MAY BE ADDRESSED TO: A. ROLAND
ROBERGE, BANK COMMISSIONER, STATE OF NEW HAMPSHIRE, 169 MANCHESTER STREET,
CONCORD, NEW HAMPSHIRE 03301.
Chapter 388 requires the Bank Commissioner to make a determination that,
among other things, the "public convenience and advantage and the interest of
[the merging] institutions, their members, stockholders, and depositors, will
be promoted by the proposed union." Thus, Chapter 388 expressly contemplates
that the Bank Commissioner, in approving the Merger, must determine, among
other things, that the proposal will promote the interests of Primary Bank's
stockholders.
<PAGE> 51
Granite State has received a "no-action" letter from the staff of the
Commission indicating that, based in part on the Bank Commissioner's
determination that the Merger promotes the interests of Primary Bank's
stockholders, the staff will not recommend any enforcement action to the
Commission if Granite State issues shares of Granite State Common Stock to
Primary Bank's stockholders in the Merger without registration of the shares
under the Securities Act in reliance upon the exemption provided by Section
3(a)(10) thereof. The "no-action" letter also confirms that, although the
shares of Granite State Common Stock that will be issued in the Merger will not
be registered under the Securities Act, the shares will not be restricted as to
resale (i.e., they may be freely resold) by Primary Bank's stockholders, except
for shares issued to certain affiliates of Primary Bank. For additional
information, see "--Resale of Granite State Common Stock."
RESALE OF GRANITE STATE COMMON STOCK
The Granite State Common Stock issued pursuant to the Merger will be
freely transferable under the Securities Act except for shares issued to any
Primary Bank stockholder who may be deemed to be an "affiliate" of Primary Bank
or Granite State for purposes of Rule 145 under the Securities Act. In
addition, each director and senior executive officer of Primary Bank has
entered into an Affiliate Agreement with Granite State providing that, as an
affiliate, he or she will not transfer any Granite State Common Stock received
in the Merger except in compliance with the Securities Act and pursuant to the
terms of his or her Affiliate Agreement, and will make no dispositions of any
Granite State Common Stock or Primary Bank Common Stock (or any interest
therein) during the period commencing 30 days prior to the Effective Date
through the date on which financial results covering at least 30 days of
combined operations of Granite State and Primary Bank after the Merger have
been made public. A copy of a form of Affiliate Agreement is included as
EXHIBIT 2 to the Agreement attached hereto as APPENDIX A. This Joint Proxy
Statement does not cover resales of Granite State Common Stock received by any
person who may be deemed an affiliate of Primary Bank or Granite State.
RIGHTS OF DISSENTING STOCKHOLDERS
Holders of Granite State Common Stock will not be entitled to appraisal
rights under New Hampshire law in connection with the matters to be acted upon
at the Granite State Special Meeting.
Each Primary Bank stockholder who objects to the Merger shall be entitled
to the rights and remedies of dissenting stockholders provided in the New
Hampshire Revised Statutes Annotated Sections 293-A:13.01-.31 and 388:13 (the
"Dissenters' Rights Statute"), which are set forth in APPENDIX D hereto, and
the following summary of such rights and remedies is qualified in its entirety
by reference to such attachment.
The Dissenters' Rights Statute provides that any stockholder who wishes
to dissent and obtain payment for his or her shares must deliver to Primary
Bank prior to the stockholder vote on the Merger, a written notice of his or
her intention to demand payment for his or her shares if the Merger is
consummated, and that the stockholder shall refrain from voting his or her
shares in favor of the Merger. A stockholder who fails in either respect waives
any statutory right to payment for his or her shares. A stockholder need not
vote against approval of the Merger, and voting against such approval will not
satisfy the requirement of the Dissenters' Rights Statute that prior notice be
given of an intention to demand payment.
If the Merger is approved, the Dissenters' Rights Statute provides that
Primary Bank shall give notice to dissenters within ten days of such approval,
which shall state where and when a demand for payment must be sent and
certificates deposited in order to obtain payment, together with a form for
demanding payment and a date by which the payment demand must be received. Upon
receipt of a payment demand, Primary Bank shall pay each dissenter the amount
that it considers to be fair value for the shares of Primary Bank Common Stock
<PAGE> 52
plus accrued interest together with a notice containing certain information
regarding the value of such shares and stating that the stockholder may demand
supplemental payment if he or she believes Primary Bank's payment to be less
than fair value by sending to Primary Bank his or her own estimate of fair
value. If the supplemental payment remains unsettled, Primary Bank must
initiate proceedings within 60 days of the demand in an appropriate court for
determination of fair value by the court for all dissenters whose demands have
not been settled. The court's jurisdiction is plenary and exclusive. The court
may appoint appraisers to take evidence and recommend a decision on fair value.
HOLDERS OF PRIMARY BANK COMMON STOCK SHOULD BE AWARE THAT THEIR FAILURE
TO PROCEED IN ACCORDANCE WITH THE PROVISIONS OF RSA 293-A:13.01-.31 AND 388:13
WILL RESULT IN A LOSS OF ALL DISSENTERS' RIGHTS AND RESULT IN THEIR BEING BOUND
BY THE MERGER. The shares held by a Primary Bank stockholder who has lost his
or her dissenters' rights by failing to comply with the statutory procedures
will be converted into shares of Granite State Common Stock and cash in lieu of
any fractional share as though such stockholder had assented to the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
STOCK OPTIONS
As of the Record Date, the directors and executive officers of Primary
Bank beneficially own approximately 507,181 shares of Primary Bank Common
Stock, including options ("Primary Bank Stock Options") to purchase 285,422
shares of Primary Bank Common Stock, 250,750 of which were vested as of the
Primary Bank Record Date. On the Effective Date, each Primary Bank Stock
Option, will be assumed by Granite State. Each Primary Bank Stock Option
assumed by Granite State shall continue to be subject to the same terms and
conditions as those to which it was subject immediately prior to the Effective
Date, except that (i) such Primary Bank Stock Options shall immediately vest
and be exercisable for a number of shares of Granite State Common Stock equal
to the product of the number of shares of Primary Bank Common Stock covered by
the Primary Bank Stock Option multiplied by the Exchange Ratio; and (ii) the
exercise price per share of Granite State Common Stock shall be equal to the
exercise price per share of Primary Bank Common Stock of such Primary Bank
Stock Option, divided by the Exchange Ratio.
The following table sets forth the number of options held by directors
and officers of Primary Bank, and the estimated value of such options:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED VALUE
DIRECTORS/EXECUTIVE OFFICERS OPTIONS OF OPTIONS<F1>
---------------------------- --------- ---------------
<S> <C> <C>
Christopher J. Flynn 81,523 $1,391,294
President, CEO and Director
Michael J. Janosco, Jr. 30,675 428,333
Senior Vice President and CFO
Charles P. Monaghan 30,675 501,770
Senior Vice President
Elizabeth M. Rank 30,675 501,770
Senior Vice President
Bruce D. Clow 38,063 573,609
Executive Vice President
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED VALUE
DIRECTORS OPTIONS OF OPTIONS<F1>
--------- --------- ---------------
<S> <C> <C>
Richard E. Amidon 6,094 105,349
Daniel E. Church 4,495 57,389
David J. Houston 7,249 121,019
Charles W. Wagner 7,249 121,019
Charles F. Whittemore 4,495 57,389
David A. Jordan 7,249 121,019
Thomas D. Rath 5,650 73,060
Peter C. Read 7,249 121,019
Richard R. Fernald 7,249 121,019
Forrest McKerley 5,615 72,501
Dwight D. Sowerby 6,094 95,009
Katharine A. Eneguess 5,123 63,951
<FN>
- --------------------
<F1> Represents the difference between the market value of shares of Primary
Bank Common Stock covered by options on July 30, 1997 based on the last
sale price on such date of $25.50, and the aggregate option price.
</FN>
</TABLE>
INDEMNIFICATION
The Agreement provides that from and after the Effective Date through the
sixth anniversary thereof, and subject to the limitations and procedural
requirements contained in the Agreement, Granite State will indemnify present
and former directors and officers of Primary Bank determined as of the Closing
Date to the fullest extent to which directors and officers of Primary Bank are
entitled under New Hampshire law, Primary Bank's Articles of Agreement and
Bylaws, or other applicable law. In addition, the Agreement requires Granite
State to use its best efforts to cause the persons serving as officers and
directors of Primary Bank immediately prior to the Effective Date to be covered
for a period of three years from the Effective Date by the directors' and
officers' liability insurance policy maintained by Primary Bank, or comparable
coverage, with respect to acts or omissions occurring prior to the Effective
Date which were committed by such officers and directors in their capacity as
such, provided that (i) Granite State is not required to expend more than
$30,000 annually to maintain or procure such insurance coverage, and (ii) if
Granite State is unable to maintain or obtain such insurance, Granite State
shall use all reasonable efforts to obtain as much comparable insurance as is
available for such amount.
In so far as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons, Granite
State's management has been informed that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy expressed in
the Securities Act and is therefore, unenforceable.
OTHER
On the Effective Date, Mr. Christopher J. Flynn, if he is the President
and Chief Executive Officer of Primary Bank immediately prior to the Effective
Date, shall become the President of Granite Bank, and Mr. Charles P. Monaghan,
if he is a Senior Vice President of Primary Bank immediately prior to the
Effective Date, shall become a Senior Vice President of Granite Bank. If the
Effective Date occurs in calendar year 1997, Messrs. Flynn and Monaghan shall
be entitled to participate in the Granite Bank senior officer incentive
compensation bonus plan for 1997 on the same basis as other senior officers of
Granite Bank.
<PAGE> 54
Mr. Flynn shall be offered a three-year employment Agreement with Granite
Bank on terms no less favorable than the contract between Primary Bank and Mr.
Flynn in effect as of the date of the Agreement, and which shall provide that
Mr. Flynn is not entitled to any payments under his employment agreement in
effect as of the date thereof as a result of the Agreement and the Merger. Upon
the Effective Date, Mr. Flynn shall be granted an incentive stock option by
Granite State to purchase 5,000 shares of Granite State Common Stock at an
exercise price equal to the Granite State Trading Price, which option shall be
exercisable in equal instalments over a five-year period and which shall vest
immediately upon a change in control of Granite State. In addition, Mr. Flynn
will be entitled to participate in a Supplemental Executive Retirement Plan
that will provide him with benefits to which he would have been entitled under
any tax qualified employee pension plan sponsored by Granite Bank but for the
limitations imposed by the Code. Mr. Monaghan shall be offered an employment
agreement substantially equivalent to the contract between Primary Bank and Mr.
Monaghan in effect as of the date of the Agreement, which employment Agreement
shall terminate two years from the Effective Date, shall provide a severance
payment upon termination equal to two year's salary , and which shall provide
that no payments thereunder (or under the existing employment and special
termination Agreement between Primary Bank and Mr. Monaghan) are due Mr.
Monaghan as a result of the Merger. Upon the Effective Date, Mr. Monaghan shall
also be provided a special termination agreement substantially in the form
currently provided to the executive officers of Granite State.
CERTAIN RELATED TRANSACTIONS
STOCK OPTION AGREEMENT
General. As a condition to entering into the Agreement, Primary Bank
executed and delivered to Granite State the Stock Option Agreement, dated as of
April 29, 1997 (the "Stock Option Agreement"). A copy of the Stock Option
Agreement is attached as EXHIBIT 3 to the Agreement, which is attached hereto
as APPENDIX A. Pursuant to the Stock Option Agreement, Granite State was
granted an option to purchase up to 269,464 shares of Primary Bank Common Stock
(the "Option"). The exercise price per share to purchase Primary Bank Common
Stock under the option is equal to $22.75. In the event that Primary Bank
issues or agrees to issue any shares of Primary Bank Common Stock at a price
that is less than $22.75 per share, then the exercise price of the options
granted under the Stock Option Agreement shall be equal to such lower price. In
the event any additional shares of Primary Bank Common Stock are outstanding,
the number of shares of Primary Bank Common Stock subject to the Stock Option
Agreement shall be increased so that after such issuance it equals
approximately 12.9% of the number of shares of Primary Bank Common Stock
outstanding.
Terms of the Stock Option Agreement. In the event that Primary Bank
enters into an agreement relating to a Superior Acquisition Proposal, then the
total number of shares issuable upon exercise of the Option shall be reduced so
that the aggregate dollar value of the difference between the aggregate option
exercise price to be paid by Granite State and the aggregate Applicable Price
(as defined below) shall not exceed $2.5 million. The term Applicable Price is
defined in the Stock Option Agreement as the highest of (i) the highest price
per share of Primary Bank Common Stock paid for any such share by any person or
group (other than Granite State or any Granite State subsidiary (a
"Subsidiary")) who shall have acquired beneficial ownership of, or the right to
acquire beneficial ownership of, 50% or more of the then outstanding shares of
Primary Bank Common Stock, (ii) the price per share of Primary Bank Common
Stock received by holders of Primary Bank Common Stock in connection with any
merger or other business combination transaction with any person other than
Granite State or a Subsidiary, or (iii) the highest closing bid price per share
of Primary Bank Common Stock quoted on the Nasdaq National Market during the 40
business days preceding the date on which Granite State exercises its
repurchase rights as described below. In the event of a sale of less than all
of Primary Bank's assets, the Applicable Price shall be the sum of the price
paid in such sale for such assets and the current market
<PAGE> 55
value of the remaining assets of Primary Bank as determined by a nationally
recognized investment banking firm selected by Granite State, divided by the
number of shares of Primary Bank Common Stock outstanding at the time of such
sale.
Pursuant to the Stock Option Agreement, the Option becomes exercisable in
whole or in part at any time after the occurrence of both an Initial Triggering
Event (as defined below) and a Subsequent Triggering Event (as defined below).
The term Initial Triggering Event is defined to include any of the following
events or transactions occurring after the date of the Agreement: (i) Primary
Bank, without having received Granite State's prior written consent, enters
into an agreement to engage in (x) a merger or consolidation, or any similar
transaction, (y) a purchase, lease or other acquisition involving all or
substantially all of the assets of Primary Bank, or (z) a purchase or other
acquisition (including by way of merger, consolidation, share exchange or
otherwise) of beneficial ownership of securities representing 25% or more of
the voting power of Primary Bank (together, an "Acquisition Transaction") with
any person other than Granite State or any of its Subsidiaries; (ii) (A) any
person other than Granite State or a Subsidiary, alone or together with such
person's affiliates and associates, has acquired beneficial ownership or the
right to acquire beneficial ownership of 25% or more of the outstanding shares
of Primary Bank Common Stock or (B) any group, other than a group of which only
Granite State or a Subsidiary are members, shall beneficially own 25% or more
of the shares of Primary Bank Common Stock then outstanding; (iii) the Board of
Directors of Primary Bank shall have failed to recommend to its stockholders
the adoption of the Agreement or shall have withdrawn, modified or changed its
recommendation in a manner adverse to Granite State; (iv) after a proposal is
made by a third party (other than Granite State or a Subsidiary) to Primary
Bank to engage in an Acquisition Transaction, Primary Bank shall have
intentionally and knowingly breached any representation, warranty, covenant or
agreement contained in the Agreement and such breach (x) would entitle Granite
State to terminate the Agreement pursuant to certain specified sections and (y)
shall not have been cured prior to a specified date; or (v) any person other
than Granite State or its Subsidiaries, other than in connection with a
transaction to which Granite State has given its prior written consent, shall
have filed an application or notice with any federal or state bank regulatory
authority for approval to engage in an Acquisition Transaction.
The term Subsequent Triggering Event shall mean: (i) the acquisition by
any person other than Granite State or its Subsidiaries of beneficial ownership
of 25% or more of the then outstanding Primary Bank Common Stock; or (ii) the
occurrence of the Initial Triggering Event described in subparagraph (i) of the
preceding paragraph.
In the event that Primary Bank enters into an agreement (i) to
consolidate with or merge into any person, other than Granite State or a
Subsidiary, and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person other than Granite State or
a Subsidiary to merge into Primary Bank and Primary Bank shall be the
continuing or surviving corporation, but, in connection with such merger, the
then outstanding shares of Primary Bank Common Stock shall be changed into or
exchanged for securities of any other person or cash or any other property or
the then outstanding shares of Primary Bank Common Stock shall after such
merger represent less than 50% of the outstanding shares of the merged company,
or (iii) to sell or otherwise transfer all or substantially all of its assets
to any person, other than Granite State or a Subsidiary, then, the agreement
governing such transaction shall make proper provision so that the Option
shall, upon the consummation of any such transaction, be converted into an
option (the "Substitute Option"), at the election of Granite State, of either
(x) the Acquiring Corporation (as defined in the Stock Option Agreement) or (y)
any person that controls the Acquiring Corporation. The Substitute Option shall
have the same terms and conditions as the Option, provided, that if any term or
condition of the Substitute Option cannot, for legal reasons, be the same as
the Option, such term or condition shall be as similar as possible and in no
event less advantageous to Granite State.
<PAGE> 56
Repurchase at the Option of Granite State. At the request of Granite
State, at any time up to 12 months after any person or group (other than
Granite State or a Subsidiary) has acquired beneficial ownership of, or the
right to acquire beneficial ownership of, 50% or more of the then outstanding
shares of Primary Bank Common Stock, or any of the transactions that gives
Granite State the right to receive a "Substitute Option" has been consummated
(a "Repurchase Event"), Primary Bank shall repurchase from Granite State (i)
the Option and (ii) all shares of Primary Bank Common Stock purchased by
Granite State pursuant to the Stock Option Agreement and with respect to which
Granite State then has beneficial ownership. The date on which Granite State
exercises its repurchase rights is referred to as the "Request Date." Such
repurchase shall be at an aggregate price (the "Repurchase Consideration")
equal to the sum of: (i) the aggregate exercise price paid by Granite State for
any shares of Primary Bank Common Stock acquired pursuant to the Option with
respect to which Granite State then has beneficial ownership; (ii) the excess,
if any, of (x) the Applicable Price for each share of Primary Bank Common Stock
over (y) the option exercise price, multiplied by the number of shares of
Primary Bank Common Stock with respect to which the Option has not been
exercised; and (iii) the excess, if any, of the Applicable Price over the
exercise price paid by Granite State for each share of Primary Bank Common
Stock with respect to which the Option has been exercised and with respect to
which Granite State then has beneficial ownership, multiplied by the number of
such shares.
Effect of the Stock Option Agreement. The Stock Option Agreement,
together with (i) Primary Bank's agreement to not solicit other transactions
relating to the acquisition of Primary Bank by a third party and (ii) the
Affiliate Agreement executed by each Primary Bank directors and senior
executive officers pursuant to which each agreed to vote their shares in favor
of the Agreement (see "THE MERGER--No Solicitation of Transactions"), may have
the effect of discouraging persons who might now or prior to the Effective Date
be interested in acquiring all of or a significant interest in Primary Bank
from considering or proposing such an acquisition, even if such persons were
prepared to pay a higher price per share for Primary Bank Common Stock than the
price per share implicit in the Merger. Certain attempts to acquire Primary
Bank or an interest in Primary Bank would cause the Option to become
exercisable as described above. Granite State's exercise of such option would
significantly increase a potential acquiror's cost of acquiring Primary Bank
compared to the cost that would be incurred without the Stock Option Agreement.
Such increased cost might discourage a potential acquiror from considering or
proposing an acquisition or might result in a potential acquiror proposing to
pay a lower per share price to acquire Primary Bank than it might otherwise
have proposed to pay. In addition, the management of Granite State and Primary
Bank believe that the existence of the Stock Option Agreement is likely to
prohibit any acquiror of Primary Bank from accounting for any acquisition of
Primary Bank using the "pooling of interests" accounting method. In addition,
exercise of the Option would increase the ability of Granite State to obtain
the approval of Primary Bank's stockholders necessary to complete the Merger
and adversely affect the ability of a third party to obtain any necessary
approval of such stockholders to complete an alternative transaction.
INFORMATION WITH RESPECT TO GRANITE STATE
GENERAL
Financial and other information relating to Granite State, information
relating to Granite State's directors and executive officers, is incorporated
herein by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"AVAILABLE INFORMATION."
<PAGE> 57
MARKET PRICE OF AND DIVIDENDS ON GRANITE STATE COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Granite State Common Stock is listed on the Nasdaq National Market
System under the symbol "GSBI". As of the Granite State Record Date, Granite
State had approximately 759 stockholders of record. The table below sets forth
for the periods indicated the amount of dividends declared per share and the
quarterly ranges of high and low sales prices for Granite State Common Stock as
reported by the Nasdaq National Market System and does not necessarily reflect
mark-ups, mark-downs or commissions. All per share information has been
adjusted to show the effect of all stock dividends and stock splits paid
through the date of this Joint Proxy Statement.
<TABLE>
<CAPTION>
QUARTERLY
------------------------------
QUARTER ENDED DIVIDEND HIGH LOW
------------- -------- ------- -------
<S> <C> <C> <C>
September 30, 1997 (through July 30).......... $ -- $ 21.50 $ 18.75
June 30, 1997................................. 0.11 19.00 16.17
March 31, 1997................................ 0.11 17.67 14.50
December 31, 1996............................. 0.09 15.17 12.42
September 30, 1996............................ 0.09 12.50 12.00
June 30, 1996................................. 0.09 12.50 11.58
March 31, 1996................................ 0.09 12.00 10.75
December 31, 1995............................. 0.08 11.50 10.75
September 30, 1995............................ 0.08 11.50 8.71
June 30, 1995................................. 0.08 9.08 8.17
March 31, 1995................................ 0.08 8.83 7.58
</TABLE>
The last reported sale price of Granite State Common Stock on April 29,
1997, the last trading day prior to the announcement of the Merger on the
evening of April 29, was at a price of $16.958 (as adjusted) per share. On July
30, 1997, the last sale price for the Granite State Common Stock was 20.625 per
share. The average weekly trading volume for the Granite State Common Stock
during the quarter ended March 31, 1997 was approximately 15,415 shares.
For certain limitations on the ability of Granite Bank to pay dividends
to Granite State, see Granite State's Annual Report on Form 10-KSB for the year
ended December 31, 1996, which is incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
INFORMATION WITH RESPECT TO PRIMARY BANK
GENERAL
Financial and other information concerning Primary Bank, including
information relating to Primary Bank's directors and executive officers, is
incorporated herein by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
MARKET PRICE OF AND DIVIDENDS ON PRIMARY BANK COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Primary Bank Common Stock is listed on the Nasdaq National Market
System under the symbol "PETE." As of the Primary Bank Record Date, there were
approximately 586 holders of record. The table below sets forth for the periods
indicated the quarterly ranges of high and low bid prices as reported by Nasdaq
for the periods indicated. Such prices do not necessarily reflect mark-ups,
mark-downs or commissions.
<PAGE> 58
Primary Bank has never declared or paid a cash dividend. Prices are not
adjusted for the 5% stock dividends paid as of January 1997 and October 1995.
<TABLE>
<CAPTION>
QUARTERLY
-------------------
QUARTER ENDED HIGH LOW
------------- ------- -------
<S> <C> <C>
September 30, 1997 (through July 30)......... $ 27.25 $ 25.00
June 30, 1997................................ 25.25 16.13
March 31, 1997............................... 18.75 14.75
December 31, 1996............................ 16.00 12.25
September 30, 1996........................... 13.25 11.75
June 30, 1996................................ 13.25 12.00
March 31, 1996............................... 13.00 11.50
December 31, 1995............................ 15.50 12.00
September 30, 1995........................... 15.75 13.50
June 30, 1995................................ 14.50 10.50
March 31, 1995............................... 11.75 9.75
</TABLE>
The last reported sale price of Primary Bank Common Stock on April 29,
1997, the last trading day prior to the announcement of the acquisition on the
evening of April 29, was $22.688 per share. On July 30, 1997, the last sale
price for Primary Bank Common Stock was $25.50 per share.
Under the Agreement, Primary Bank is not permitted to pay dividends
without the prior written consent of Granite State. See "THE MERGER--Conditions
to the Merger."
COMPARISON OF STOCKHOLDER RIGHTS
Granite State is a New Hampshire corporation. Primary Bank is a New
Hampshire-chartered savings bank. Under New Hampshire law, the rights of
holders of Granite State Common Stock and Primary Bank Common Stock are
generally governed, directly or indirectly, by the New Hampshire Business
Corporation Act, and in the case of Primary Bank by New Hampshire banking law.
The rights of holders of Granite State Common Stock are also governed by
Granite State's Articles and Bylaws. The rights of holders of Primary Bank
Common Stock are also governed by Primary Bank's Articles and Bylaws.
The rights of stockholders of Granite State and Primary Bank with respect
to cumulative voting, preemptive rights, limitations on officers' and directors
liability for monetary damages, dividends, classification of directors, actions
by written consent of stockholders and the quorum necessary for stockholder
meetings are generally comparable. Certain significant differences between the
rights of stockholders of Granite State and Primary Bank with respect to other
provisions are set forth below.
This summary contains a list of material differences, but is not meant to
be relied upon as an exhaustive list or a detailed description of the
provisions discussed and is qualified in its entirety by reference to Granite
State's Articles and Bylaws, Primary Bank's Articles and Bylaws, and the New
Hampshire Business Corporation Act.
DIRECTORS
Nomination. Stockholders of both Primary Bank and Granite State are
required to submit to their respective companies, in writing, in advance and in
compliance with certain other procedural requirements, any nomination of a
candidate for election as a director. Granite State's Bylaws provide that such
nominations
<PAGE> 59
generally must be submitted at least 120 days in advance of the date of the
Granite State proxy statement released to stockholders in connection with the
previous years' annual meeting, except in the event that Granite State's
Nominating Committee does not act at least 20 days prior to the annual meeting,
in which case nominations may be made by any stockholder entitled to vote at
the meeting. Primary Bank's Bylaws provide that its stockholders must submit
written nominations, (i) not later than 70 days prior to the anniversary date
of the previous years' annual meeting in the case of an election to be held at
an annual meeting, and (ii) not later than the close of business on the tenth
day following the date on which notice of such meeting is first given to
stockholders in the case of an election to be held at a special meeting.
Removal. Pursuant to Granite State's Articles, Granite State directors
may be removed from office only for cause. Under Primary Bank's Articles, any
director may be removed from office, with or without cause, by an affirmative
vote of the holders of at least 80% of Primary Bank's voting stock at a meeting
of stockholders called for such purpose.
Vacancies. Granite State's Articles provide that any vacancy in the board
of directors may be filled by a majority vote of the remaining directors,
though less than a quorum. A director so chosen holds office for the unexpired
term of his predecessor. Any directorship to be filled by reason of an increase
in the authorized number of directors may be filled by the Board of Directors
for a term of office continuing only until the next annual meeting of
stockholders. Primary Bank's Articles provide that any vacancy in the board of
directors may be filled by a majority vote of the remaining directors, though
less than a quorum. A director so chosen holds office until the next election
of directors by stockholders. Any directorship to be filled by reason of an
increase in the authorized number of directors may be filled by the Board of
Directors for a term of office continuing only until the next election of
directors by the stockholders at an annual meeting.
Indemnification. The Bylaws of Granite State generally provide that to
the fullest extent permitted by New Hampshire law, Granite State shall
indemnify each director and officer against all expenses and liabilities
reasonably incurred in connection with any proceeding in which he or she may be
involved by reason of his or her being a director or officer. Granite State
shall not, however, indemnify such director or officer with respect to matters
as to which he or she is determined in any such proceeding to have been liable
for willful misconduct in the performance of his or her duties. In the event of
a settlement, indemnification may be had only if the board of directors
determines that such settlement is in the best interests of Granite State 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 adopts a resolution approving such settlement.
Primary Bank's Articles provide that Primary Bank shall indemnify any
person who was or is threatened to be made a party to any proceeding by reason
of the fact that such party is or was serving as a director or officer or
employee for all expenses incurred in connection with defense or settlement of
such proceeding, and such amount of any judgment, money decree, fine, penalty
as the Board deems reasonable, to the extent permitted by the New Hampshire
Business Corporation Act if Primary Bank were subject to such act.
STOCKHOLDERS' MEETINGS
Granite State's Articles provide that special meetings of Granite State
stockholders relating to a change in control of Granite State or amendments to
its Articles may only be called by the Board of Directors, and its Bylaws
provide that special meetings for any other purpose may be called by the
Chairman of the Board, President or a majority of the Board of Directors, and
shall be called upon the written request of holders of not less than one-tenth
of all the outstanding capital stock entitled to vote at the meeting. Primary
Bank's Bylaws provide that special meetings for any purpose may be called by
the Chairman of the Board, President or a
<PAGE> 60
majority of the Board of Directors, and shall be called upon the written
request of holders of not less than 80% of the outstanding capital stock
entitled to vote on the matter for which the meeting was called.
REQUIRED STOCKHOLDER VOTES
General. Subject to the voting rights of any series of preferred stock
then outstanding and certain other provisions of Granite State's Articles,
including the provisions described below, the holders of Granite State Common
Stock possess exclusive voting rights of Granite State. Each holder of Granite
State Common Stock is entitled to one vote for each share owned of record.
There are no cumulative voting rights in the election of directors.
Subject to the voting rights of any series of preferred stock then
outstanding and certain other provisions of Primary Bank's Articles, including
the provisions described below, the holders of Primary Bank Common Stock
possess exclusive voting rights of Primary Bank. Each holder of Primary Bank
Common Stock is entitled to one vote for each share owned of record. Except as
provided by law and Primary Bank's Articles, a vote of an affirmative majority
of shares of Primary Bank Common Stock represented in person or by proxy shall
be required to approve any matter presented for consideration at a meeting of
stockholders. There are no cumulative voting rights in the election of
directors. Primary Bank's Articles also provide that for a period of five years
from Primary Bank's October 13, 1993, mutual-to-stock conversion, record
holders of Primary Bank Common Stock who beneficially own in excess of 10% of
the outstanding shares of Primary Bank Common Stock (the "Limit") are not
entitled to any vote with respect to the shares held in excess of the Limit. A
person or entity is deemed to beneficially own shares owned by an affiliate of,
as well as persons acting in concert with, such person or entity. Primary
Bank's Articles authorize the Board of Directors (i) to make all determinations
necessary to implement and apply the Limit, including determining whether
persons or entities are acting in concert, and (ii) to demand that any person
who is reasonably believed to beneficially own stock in excess of the Limit
supply information to the Company to enable the Board to implement and apply to
Limit. The Board of Directors of Primary Bank is not aware of any person who
beneficially owns shares of Primary Bank Common Stock in excess of the Limit
with respect to the matters to be considered at the Primary Bank Special
Meeting.
Business Combinations. The Granite State Articles contain a so-called
"fair price" provision pursuant to which certain "business combinations" with
an "interested stockholder" (as defined in the Granite State Articles),
including a merger or consolidation, require the approval of the holders of at
least 80% of Granite State's voting stock. Such higher vote is not required if:
(i) the business combination is approved by Granite State's Board of Directors,
or (ii) generally, the consideration to be received by the stockholders of
Granite State conforms to certain tests set forth in the Articles relating to
trading price of Granite State shares, the highest consideration paid by the
other party to the business combination in acquiring Granite State shares, and
the fair market value of the Granite State shares. This provision may
discourage an attempt to acquire control of Granite State which the majority of
the stockholders of Granite State might determine to be in their best interest
or in which stockholders of Granite State might receive a premium over the
current market price for their shares.
Amendment of Articles. Granite State's Articles contain various
provisions that require a supermajority vote of stockholders to amend or repeal
particular sections of such Articles. Amendment or repeal of the provisions of
Granite State's Articles relating to directors of Granite State, special
meetings relating to a change of control, the fair price provisions, and the
general requirements relating to amendment of the Articles require an
affirmative vote of 80% or more of the total votes eligible to be cast at a
legal meeting. Unless otherwise provided, amendment of the Articles requires
approval by a majority of the votes eligible to be cast at a legal meeting.
<PAGE> 61
Primary Bank's Articles provide that the Articles may not be amended
unless the amendment is first approved by a majority of the Board of Directors
and thereafter approved by an affirmative vote of the holders of at least a
majority of Primary Bank's voting stock.
AMENDMENT OF BYLAWS
Granite State's Articles provide that the Bylaws may be amended by a
majority vote of the Board of Directors or by a majority of the votes of
stockholders at a legal meeting, except in the case of any amendment or repeal
of, or adoption of provisions inconsistent with, provisions relating to special
meetings, and the Board of Directors and removal of a director, all of which
require the affirmative vote of the holders of 80% of the total votes eligible
to be cast at a legal meeting.
Primary Bank's Articles provide that the Bylaws may be amended or
repealed by the Board of Directors, subject to the right of stockholders to
amend or repeal such action by the Board. Such action by the Board of Directors
requires an affirmative vote of a majority of the Board. Such action by the
stockholders requires the affirmative vote of the holders of 80% of Primary
Bank's voting stock represented in person or by proxy at a duly constituted
meeting.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The consolidated financial statements of Granite State, at December 31,
1996 and for each of the three years in the period ended December 31, 1996,
included in Granite State's Annual Report on Form 10-KSB, and the report of
Grant Thornton LLP, independent certified public accountants, are incorporated
by reference herein. Representatives of Grant Thornton LLP are expected to be
present at the Granite State Special Meeting, will have the opportunity to make
a statement if they so desire, and are expected to be available to respond to
appropriate questions.
The consolidated financial statements of Primary Bank at December 31,
1996 and for each of the three years in the period ended December 31, 1996,
included in Primary Bank's Annual Report on Form F-2, and the report of KPMG
Peat Marwick LLP, independent certified public accountants, are incorporated by
reference herein. Representatives of KPMG Peat Marwick LLP are expected to be
present at the Primary Bank Special Meeting, will have the opportunity to make
a statement if they so desire, and are expected to be available to respond to
appropriate questions.
LEGAL MATTERS
The validity of the Granite State Common Stock to be issued in the
Merger, certain federal income tax consequences of the Merger, and certain
other legal matters relating to the Merger are being passed upon for Granite
State by the law firm of Luse Lehman Gorman Pomerenk & Schick, P.C., counsel to
Granite State. Certain legal matters will be passed upon for Primary Bank by
Goodwin, Procter & Hoar LLP, counsel to Primary Bank.
STOCKHOLDER PROPOSALS
Any Granite State stockholder who desires to submit a proposal for
inclusion, if appropriate, in Granite State's proxy statement and the form of
proxy relating to the 1998 Annual Meeting of Stockholders is required to submit
the proposal to Granite State Bankshares, Inc., not later than November 24,
1997. Any such proposal will be subject to the Commission's Rule 14a-8.
<PAGE> 62
Any Primary Bank stockholder who wishes to submit a proposal for
inclusion, if appropriate, in Primary Bank's proxy statement and the form of
proxy relating to the 1998 Annual Meeting of Stockholders, if the Merger has
not been completed prior to the date the meeting is to be held, is required to
submit the proposal to Primary Bank not later than March 19, 1998.
OTHER MATTERS
The Boards of Directors of Granite State and Primary Bank are not aware
of any business to come before the Special Meetings other than those matters
described above in this Joint Proxy Statement. However, if any other matter
should properly come before the Special Meetings, including proposals to
adjourn a Special Meeting to permit further solicitation of proxies in the
event that there are not sufficient votes to approve any proposal at the time
of the Special Meeting, it is intended that holders of the proxies will act in
accordance with their best judgment.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Granite State (File
No. 0-14895) pursuant to the Exchange Act are incorporated by reference in this
Joint Proxy Statement.
1. Granite State's Annual Report on Form 10-KSB for the year ended
December 31, 1996 (including certain information contained in
Granite State's Proxy Statement dated March 24, 1997, used in
connection with Granite State's Annual Meeting of Stockholders and
incorporated by reference in the Form 10-KSB).
2. Granite State's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
Accompanying this Joint Proxy Statement are Granite State's Annual Report
to Stockholders for the fiscal year ended December 31, 1996, Granite State's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and Granite
State's Proxy Statement dated March 24, 1997 used in connection with Granite
State's Annual Meeting.
The following documents filed with the FDIC by Primary Bank pursuant to
the Exchange Act accompany this Joint Proxy Statement and are incorporated
herein by reference:
1. Primary Bank's Annual Report on Form F-2 for the year ended
December 31, 1996.
2. Primary Bank's 1996 Annual Report to Stockholders.
3. Primary Bank's Quarterly Report on Form F-4 for the quarter ended
March 31, 1997.
4. Primary Bank's Current Report on Form F-3 dated May 12, 1997.
In addition, all documents filed with the Commission by Granite State
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent
to the date of this Joint Proxy Statement and prior to the date of the Special
Meetings, and all documents filed with the FDIC by Primary Bank pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Joint Proxy Statement and prior to the date of the Special Meetings
shall be deemed to be incorporated by reference in this Joint Proxy Statement
and to be a part hereof from the dates of filing of such documents or reports.
Statements contained in this Joint Proxy Statement or in any document
incorporated in this Joint Proxy Statement by reference or supplied
<PAGE> 63
herewith as to the contents of any contract or other document referred to
herein or therein are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document, each such
statement being qualified in all respects by such reference. Any statement
contained herein or in a document all or a portion of which is incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Joint Proxy Statement to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as modified or superseded, to constitute a part of this
Joint Proxy Statement.
THIS JOINT PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS
TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT IS DELIVERED, ON WRITTEN
OR ORAL REQUEST. DOCUMENTS RELATING TO GRANITE STATE MAY BE REQUESTED FROM
CHARLES B. PAQUETTE, SECRETARY OF GRANITE STATE, 122 WEST STREET, KEENE, NEW
HAMPSHIRE 03431, (603/352-1600). DOCUMENTS RELATING TO PRIMARY BANK MAY BE
REQUESTED FROM ELIZABETH M. RANK, SECRETARY OF PRIMARY BANK, 35 MAIN STREET,
PETERBOROUGH, NEW HAMPSHIRE, 03458 (603/924-7142). IN ORDER TO ENSURE DELIVERY
OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING OF STOCKHOLDERS, REQUESTS SHOULD
BE RECEIVED FIVE DAYS PRIOR TO THE DATE OF SUCH SPECIAL MEETING OF
STOCKHOLDERS.
BY ORDER OF THE BOARD OF BY ORDER OF THE BOARD OF
DIRECTORS OF GRANITE STATE DIRECTORS OF PRIMARY BANK
BANKSHARES, INC.
/s/ Charles W. Smith /s/ Charles F. Whittemore
Charles W. Smith Charles F. Whittemore
Chairman and Chief Executive Officer Chairman of the Board
<PAGE> 64
APPENDIX A
Agreement and Plan of Reorganization
by and among Granite State, Granite Bank and Primary Bank as amended
dated as of April 29, 1997
including as Annex A the Agreement and Plan of Merger
among Granite Bank and Primary Bank and joined in by Granite State
AGREEMENT AND PLAN
OF REORGANIZATION
BY AND AMONG
GRANITE STATE BANKSHARES, INC.
GRANITE BANK
and
PRIMARY BANK
APRIL 29, 1997
AS AMENDED
<PAGE> A--1
AGREEMENT AND PLAN OF REORGANIZATION
TABLE OF CONTENTS
Page
----
AGREEMENT AND PLAN OF REORGANIZATION............................ A--6
BACKGROUND...................................................... A--6
ARTICLE I
CERTAIN DEFINITIONS
Section 1.01 Definitions...................................... A--6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PRIMARY BANK
Section 2.01 Organization..................................... A--10
Section 2.02 Capitalization................................... A--10
Section 2.03 Authority; No Violation.......................... A--11
Section 2.04 Consents......................................... A--12
Section 2.05 Financial Statements............................. A--12
Section 2.06 Taxes............................................ A--13
Section 2.07 No Material Adverse Effect....................... A--13
Section 2.08 Contracts........................................ A--13
Section 2.09 Ownership of Property; Insurance Coverage........ A--14
Section 2.10 Legal Proceedings................................ A--15
Section 2.11 Compliance With Applicable Law................... A--15
Section 2.12 ERISA............................................ A--15
Section 2.13 Brokers, Finders and Financial Advisors.......... A--16
Section 2.14 Environmental Matters............................ A--16
Section 2.15 Loan Portfolio................................... A--17
Section 2.16 Information to be Supplied....................... A--17
<PAGE> A--2
Page
----
Section 2.17 Securities Documents............................. A--17
Section 2.18 Related Party Transactions....................... A--17
Section 2.19 Schedule of Termination Benefits................. A--17
Section 2.20 Loans............................................ A--18
Section 2.21 Antitakeover Provisions Inapplicable............. A--18
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF GRANITE STATE
Section 3.01 Organization..................................... A--18
Section 3.02 Capitalization................................... A--19
Section 3.03 Authority; No Violation.......................... A--19
Section 3.04 Consents......................................... A--20
Section 3.05 Financial Statements............................. A--20
Section 3.06 Taxes............................................ A--21
Section 3.07 No Material Adverse Effect....................... A--21
Section 3.08 Ownership of Property; Insurance Coverage........ A--21
Section 3.09 Legal Proceedings................................ A--22
Section 3.10 Compliance With Applicable Law................... A--22
Section 3.11 Information to be Supplied....................... A--22
Section 3.12 ERISA and Employment Arrangements................ A--22
Section 3.13 Securities Documents............................. A--23
Section 3.14 Environmental Matters............................ A--23
Section 3.15 Loan Portfolio................................... A--24
Section 3.16 Brokers, Finders and Financial Advisors.......... A--24
Section 3.17 Loans............................................ A--24
Section 3.18 Antitakeover Provisions Inapplicable............. A--24
<PAGE> A--3
Page
----
ARTICLE IV
COVENANTS OF THE PARTIES
Section 4.01 Conduct of Primary Bank's Business............... A--24
Section 4.02 Access; Confidentiality.......................... A--27
Section 4.03 Regulatory Matters and Consents.................. A--28
Section 4.04 Taking of Necessary Action....................... A--28
Section 4.05 Certain Agreements............................... A--29
Section 4.06 No Other Bids and Related Matters................ A--30
Section 4.07 Duty to Advise; Duty to Update Primary Bank's
Disclosure Schedule............................. A--31
Section 4.08 Conduct of Granite State's Business.............. A--31
Section 4.09 Board and Committee Minutes...................... A--32
Section 4.10 Undertakings by Granite State and Primary Bank... A--32
Section 4.11 Employee and Termination Benefits; Directors and
Management...................................... A--34
Section 4.12 Duty to Advise; Duty to Update Granite State's
Disclosure Schedule............................. A--35
Section 4.13 Affiliate Letter................................. A--35
ARTICLE V
CONDITIONS
Section 5.01 Conditions to Primary Bank's Obligations under
this Agreement.................................. A--35
Section 5.02 Conditions to Granite State's Obligations under
this Agreement.................................. A--37
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination...................................... A--38
Section 6.02 Effect of Termination............................ A--39
<PAGE> A--4
Page
----
ARTICLE VII
MISCELLANEOUS
Section 7.01 Expenses......................................... A--40
Section 7.02 Non-Survival of Representations and Warranties... A--40
Section 7.03 Amendment, Extension and Waiver.................. A--40
Section 7.04 Entire Agreement................................. A--40
Section 7.05 No Assignment.................................... A--40
Section 7.06 Notices.......................................... A--40
Section 7.07 Captions......................................... A--41
Section 7.08 Counterparts..................................... A--41
Section 7.09 Severability..................................... A--41
Section 7.10 Governing Law.................................... A--41
Annex A Agreement and Plan of Merger
Exhibit 1 Granite State Directors' Agreement
Exhibit 2 Primary Bank's Affiliate Agreement
Exhibit 3 Stock Option Agreement
Exhibit 4 Form of Opinion of Granite State's Counsel
Exhibit 5 Form of Tax Opinion of Granite State's Counsel
Exhibit 6 Form of Opinion of Primary Bank's Counsel
<PAGE> A--5
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), dated as
of April 29, 1997, as amended, is by and among PRIMARY BANK ("Primary
Bank"), a New Hampshire guaranty (stock) savings bank, GRANITE BANK
("Granite Bank"), a New Hampshire bank, and GRANITE STATE BANKSHARES, INC.
("Granite State"), a New Hampshire corporation and a registered bank holding
company under the Bank Holding Company Act of 1956, as amended.
WITNESSETH
WHEREAS, the Boards of Directors of the respective parties hereto deem
it advisable and in the best interests of the respective stockholders to
consummate the business combination transaction contemplated herein in which
Primary Bank, subject to the terms and conditions set forth herein, shall be
merged with and into Granite Bank (the "Merger") pursuant to an Agreement
and Plan of Merger in the form attached hereto as Annex A ("Plan of
Merger"); and
WHEREAS, in connection with the execution of this Reorganization
Agreement, Primary Bank and Granite State have entered into a Stock Option
Agreement (the "Stock Option Agreement") dated as of even date herewith
pursuant to which Primary Bank will grant Granite State the right to
purchase certain shares of Primary Bank Common Stock; and
WHEREAS, the parties hereto desire to provide for certain
undertakings, conditions, representations, warranties and covenants in
connection with Merger, and the other transactions contemplated by this
Agreement, the Plan of Merger and the Stock Option Agreement (collectively,
the "Merger Documents").
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained and intending to
be legally bound hereby, the parties hereto do hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.01 Definitions. Except as otherwise provided herein, as used
in this Agreement, the following terms shall have the indicated meanings
(such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
"Affiliate" means, with respect to any Person, any Person who
directly, or indirectly, through one or more intermediaries, controls,
or is controlled by, or is under common control with, such Person and,
without limiting the generality of the foregoing, includes any executive
officer or director of such Person and any Affiliate of such executive
officer or director.
"Agreement" means this agreement, and any amendment or
supplement hereto.
"Applicable Exchange Ratio" shall have the meaning given to such
term in the Plan of Merger.
"Applications" means the applications for regulatory approval
which are required by the transactions contemplated hereby.
"BHC Act" means the Bank Holding Company Act of 1956, as
amended.
<PAGE> A--6
"Closing Date" means the date determined by Granite State, in
its sole discretion, upon five (5) days prior written notice to
Primary Bank, but in no event later than thirty (30) days after the
last condition precedent pursuant to this Agreement has been fulfilled
or waived (including the expiration of any applicable waiting period),
or such other date as Granite State and Primary Bank shall agree.
"Commissioner" shall mean the New Hampshire State Bank
Commissioner.
"Effective Date" means the date upon which the articles of
merger or share exchange are filed with the appropriate New Hampshire
authorities, and shall be the same as the Closing Date.
"Environmental Laws" means any Federal or state law, statute,
rule, regulation, code, order, judgement, decree, injunction, common
law or agreement with any Federal or state governmental authority
relating to (i) the protection, preservation or restoration of the
environment (including air, water vapor, surface water, groundwater,
drinking water supply, surface land, subsurface land, plant and animal
life or any other natural resource), (ii) human health or safety, or
(iii) exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of, hazardous substances, in each case
as amended and now in effect.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated from time to time
thereunder.
"FDIA" means the Federal Deposit Insurance Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"FRB" means the Board of Governors of the Federal Reserve System
or the Federal Reserve Bank of Boston, as applicable.
"GAAP" means generally accepted accounting principles as in
effect at the relevant date and consistently applied.
"Granite State Common Stock" has the meaning given to that term
in Section 3.02(a) of this Agreement.
"Granite State Disclosure Schedules" means the disclosure
schedules delivered by Granite State to Primary Bank pursuant to
Article III of this Agreement.
"Granite State Financials" means (i) the audited consolidated
financial statements of Granite State as of December 31, 1996 and for
the three years ended December 31, 1996, including the notes thereto,
(ii) the unaudited interim consolidated financial statements of
Granite State as of each calendar quarter thereafter included in
Securities Documents filed by Granite State, and (iii) the preliminary
unaudited consolidated financial statements of Granite State as of
March 31, 1997, including the preliminary notes thereto.
"Granite State Option" means the option granted to Granite State
to acquire shares of Primary Bank Common Stock referenced in the
recitals to this Agreement.
<PAGE> A--7
"Granite State Regulatory Reports" means the Annual Reports of
Granite State on Form FR Y-6, any Current Report of Granite State on
Form FR Y-9C and FR Y-LP filed with the FRB from December 31, 1995
through the Closing Date and the Reports of Condition and Income of
Granite Bank and accompanying schedules for each calendar quarter,
beginning with the quarter ended December 31, 1995, through the
Closing Date.
"Granite State Subsidiary" means any corporation, 50% or more of
the capital stock of which is owned, either directly or indirectly, by
Granite State or Granite Bank, except any corporation the stock of
which is held as security by Granite Bank in the ordinary course of
its lending activities.
"IRC" means the Internal Revenue Code of 1986, as amended.
"IRS" means the Internal Revenue Service.
"Material Adverse Effect" shall mean, with respect to Granite
State or Primary Bank, any adverse effect on its assets, financial
condition or results of operations which is material to its assets,
financial condition or results of operations on a consolidated basis,
except for any material adverse effect caused by (i) any change in the
value of the respective investment portfolios of Granite State or
Primary Bank resulting from a change in interest rates generally or
(ii) any individual or combination of changes occurring after the date
hereof in any federal or state law, rule or regulation or in GAAP,
which change(s) affect(s) financial institutions generally, including
any changes affecting the Bank Insurance Fund or the Savings
Association Insurance Fund.
"Merger" means the merger of Primary Bank with and into Granite
Bank, with Granite Bank surviving such merger, contemplated by the
Plan of Merger.
"Person" means any individual, corporation, partnership, joint
venture, association, trust or "group" (as that term is defined under
the Exchange Act).
"Plan of Merger" is the Agreement and Plan of Merger by and
between Primary Bank and Granite Bank.
"Primary Bank Common Stock" means the common stock of Primary
Bank described in Section 2.02(a).
"Primary Bank Disclosure Schedules" means the disclosure
schedules delivered by Primary Bank to Granite State pursuant to
Article II of this Agreement.
"Primary Bank Financials" means (i) the audited consolidated
financial statements of Primary Bank as of December 31, 1996 and for
the three years ended December 31, 1996, including the notes thereto,
(ii) the unaudited interim consolidated financial statements of
Primary Bank as of each calendar quarter thereafter included in
Securities Documents filed by Primary Bank and (iii) the unaudited
preliminary consolidated financial statements of Primary Bank as of
March 31, 1997, including the preliminary notes thereto.
"Primary Bank's knowledge" or similar terms with respect to
Primary Bank, means the actual knowledge of the following individuals:
Christopher J. Flynn, Michael J. Janosco Jr., and Charles P. Monaghan.
<PAGE> A--8
"Primary Bank Regulatory Reports" means the Reports of Condition
and Income of Primary Bank and accompanying schedules for each
calendar quarter, beginning with the quarter ended December 31, 1995,
through the Closing Date.
"Primary Bank Subsidiary" means any corporation, 50% or more of
the capital stock of which is owned, either directly or indirectly, by
Primary Bank, except any corporation the stock of which is held in the
ordinary course of the lending activities of Primary Bank.
"Prospectus/Proxy Statement" or "Proxy Statement" means the
prospectus/proxy statement, or, if a Registration Statement is not
filed with the SEC, the proxy statement, together with any supplements
thereto, to be transmitted to holders of Primary Bank Common Stock and
Granite State Common Stock in connection with the transactions
contemplated by this Agreement.
"Registration Statement" means any registration statement on
Form S-4, including any pre-effective or post-effective amendments or
supplements thereto, that may be filed with the SEC under the
Securities Act with respect to the Granite State Common Stock to be
issued in connection with the transactions contemplated by this
Agreement.
"Regulatory Agreement" has the meaning given to that term in
Section 2.11 of this Agreement.
"Regulatory Authority" means any agency or department of any
federal or state government, including without limitation the
Commissioner, the FDIC, the FRB, the SEC or the respective staffs
thereof.
"Rights" means warrants, options, rights, convertible securities
and other capital stock equivalents which obligate an entity to issue
its securities.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated from time to time
thereunder.
"Securities Documents" means all registration statements (if
any), schedules, statements, forms, reports, proxy material, and other
documents required to be filed under the Securities Laws.
"Securities Laws" means the Securities Act and the Exchange Act
and the rules and regulations promulgated from time to time
thereunder.
"Subsidiary" means any corporation, 50% or more of the capital
stock of which is owned, either directly or indirectly, by another
entity, except any corporation the stock of which is held as security
by either Granite Bank or Primary Bank, as the case may be, in the
ordinary course of its lending activities.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PRIMARY BANK
Primary Bank represents and warrants to Granite State that the
statements contained in this Article II are correct and complete as of the
date of this Agreement and will be correct and complete as of the Closing
<PAGE> A--9
Date (as though made then and as though the Closing Date were substituted
for the date of this Agreement throughout this Article II), except as set
forth in the Primary Bank Disclosure Schedules delivered by Primary Bank to
Granite State on the date hereof. Primary Bank has made a good faith effort
to ensure that the disclosure on each schedule of the Primary Bank
Disclosure Schedules corresponds to the section reference herein. However,
for purposes of the Primary Bank Disclosure Schedules, any item disclosed on
any schedule therein is deemed to be fully disclosed with respect to all
schedules under which such item may be relevant.
Section 2.01 Organization.
(a) Primary Bank is a duly organized guaranty (stock) savings bank,
validly existing and in good standing under the laws of New Hampshire, with
full corporate power and authority to carry on its business as now conducted
and is duly licensed or qualified to do business in the states of the United
States and foreign jurisdictions where its ownership or leasing of property
or the conduct of its business requires such qualification, except where the
failure to be so licensed or qualified would not have a Material Adverse
Effect on Primary Bank.
(b) There are no Primary Bank Subsidiaries other than those identified
in the Primary Bank Disclosure Schedule 2.01.
(c) The deposits of Primary Bank are insured by the Bank Insurance
Fund of the FDIC to the maximum extent provided in the FDIA, and Primary
Bank has paid all premium assessments that have come due and has filed all
material reports required by the FDIA. Primary Bank is a member in good
standing of the Federal Home Loan Bank of Boston and owns the requisite
amount of stock therein.
(d) Except as disclosed in Primary Bank Disclosure Schedule 2.01, the
respective minute books of Primary Bank and each Primary Bank Subsidiary
accurately record, in all material respects, all material corporate actions
of their respective shareholders and boards of directors (including
committees) through the date of this Agreement.
(e) Prior to the date of this Agreement, Primary Bank has delivered to
Granite State true and correct copies of the articles of agreement and
bylaws of Primary Bank.
Section 2.02 Capitalization.
(a) The authorized capital stock of Primary Bank consists of (a)
5,000,000 shares of common stock, $0.01 par value ("Primary Bank Common
Stock"), of which 2,085,958 shares are outstanding, validly issued, fully
paid and nonassessable and free of preemptive rights, and (b) 1,000,000
shares of preferred stock, $0.01 par value, none of which are issued or
outstanding. Neither Primary Bank nor any Primary Bank Subsidiary has or is
bound by any subscription, option, warrant, call, commitment, agreement,
plan or other Right of any character relating to the purchase, sale or
issuance or voting of, or right to receive dividends or other distributions
on any shares of Primary Bank Common Stock, Primary Bank preferred stock or
any other security of Primary Bank or any securities representing the right
to vote, purchase or otherwise receive any shares of Primary Bank Common
Stock, Primary Bank preferred stock or any other security of Primary Bank,
other than shares issuable under the Granite State Option and other than as
set forth in reasonable detail in the Primary Bank Disclosure Schedule 2.02.
Primary Bank Disclosure Schedule 2.02 sets forth the name of each holder of
options to purchase Primary Bank Common Stock, the number of shares each
such individual may acquire pursuant to the exercise of such options, and
the exercise price relating to the options held. Primary Bank Disclosure
Schedule 2.02 also sets forth the names of the holders of any unvested
awards of Primary Bank Common Stock under the Peterborough Savings Bank
Recognition and Retention Plan for Outside
<PAGE> A--10
Directors and the Peterborough Savings Bank Recognition and Retention Plan
for Officers and Employees, the number of shares underlying such awards, and
the vesting periods relating thereto.
(b) Except as set forth in the Primary Bank Disclosure Schedule 2.02,
neither Primary Bank, nor any Primary Bank Subsidiary, owns any equity
interest, directly or indirectly, in any other company or controls any other
company, except for equity interests held by Primary Bank in a fiduciary
capacity, and equity interests owned in connection with the commercial
lending activities of Primary Bank. There are no subscriptions, options,
warrants, calls, commitments, agreements or other Rights outstanding and
held by Primary Bank with respect to any other company's capital stock or
the equity of any other Person.
(c) To Primary Bank's knowledge, no Person or "group" (as that term is
used in Section 13(d)(3) of the Exchange Act), is the beneficial owner (as
defined in Section 13(d) of the Exchange Act) of 5% or more of the
outstanding shares of Primary Bank Common Stock, except as disclosed in the
Primary Bank Disclosure Schedule 2.02.
Section 2.03 Authority; No Violation.
(a) Primary Bank has full corporate power and authority to execute and
deliver this Agreement and, subject to the approval by the requisite vote of
the shareholders of Primary Bank and the approvals of the Regulatory
Authorities described in Section 3.04 hereof, to complete the transactions
contemplated hereby. Primary Bank has full corporate power and authority to
execute and deliver the Plan of Merger and, subject to the approval by the
requisite vote of the shareholders of Primary Bank and the approvals of the
Regulatory Authorities described in Section 3.04 hereof, to consummate the
Merger. The execution and delivery of this Agreement by Primary Bank and the
completion by Primary Bank of the transactions contemplated hereby have been
duly and validly approved by the Board of Directors of Primary Bank and,
except for approval by the requisite vote of the shareholders of Primary
Bank, no other corporate proceedings on the part of Primary Bank are
necessary to approve this Agreement, the Plan of Merger, and complete the
transactions contemplated hereby and thereby. This Agreement has been duly
and validly executed and delivered by Primary Bank and, subject to approval
of the requisite vote of the shareholders of Primary Bank and receipt of the
required approvals from Regulatory Authorities described in Section 3.04
hereof (and assuming the due authorization, execution and delivery by both
Granite State and Granite Bank), constitutes the valid and binding
obligation of Primary Bank, enforceable against Primary Bank in accordance
with its terms, subject to applicable conservatorship or receivership
provisions of the FDIA, or insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general principles of
equity. The Plan of Merger, upon its execution and delivery by Primary Bank
concurrently with the execution and delivery of this Agreement, and subject
to approval of the requisite vote of the shareholders of Primary Bank and
receipt of the required approvals from Regulatory Authorities described in
Section 3.04 hereof (and assuming the due authorization, execution and
delivery by both Granite State and Granite Bank), will constitute the valid
and binding obligation of Primary Bank, enforceable against Primary Bank in
accordance with its terms, subject to applicable conservatorship or
receivership provisions of the FDIA, or insolvency and similar laws
affecting creditors' rights generally and subject, as to enforceability, to
general principles of equity.
(b)(A) The execution and delivery of this Agreement by Primary Bank,
(B) the execution and delivery of the Plan of Merger by Primary Bank, (C)
subject to receipt of approvals from the Regulatory Authorities referred to
in Section 3.04 hereof and Primary Bank's and Granite State's compliance
with any conditions contained therein, the completion of the transactions
contemplated hereby, and (D) compliance by Primary Bank with any of the
terms or provisions hereof or of the Plan of Merger, will not (i) conflict
with or result in a breach of any provision of the articles of agreement or
bylaws of Primary Bank or any Primary Bank Subsidiary; (ii) assuming that
the consents and approvals referred to in Section 3.04 hereof are duly
obtained,
<PAGE> A--11
violate any statute, code, ordinance, rule, regulation, or to Primary Bank's
knowledge, judgment, order, writ, decree or injunction applicable to Primary
Bank or any Primary Bank Subsidiary or any of their respective properties or
assets; or (iii) except as set forth in the Primary Bank Disclosure Schedule
2.03, violate, conflict with, result in a breach of any provisions of,
constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in a right of termination
or acceleration or the creation of any lien, security interest, charge or
other encumbrance upon any of the properties or assets of Primary Bank or
any Primary Bank Subsidiary under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement, commitment or other instrument or obligation to which
Primary Bank or any Primary Bank Subsidiary is a party, or by which they or
any of their respective properties or assets may be bound or affected,
except for such violations, conflicts, breaches or defaults under clause
(ii) or (iii) hereof which, either individually or in the aggregate, will
not have a Material Adverse Effect on Primary Bank and its Subsidiaries
taken as a whole.
Section 2.04 Consents. Except for the consents, waivers, approvals,
filings and registrations from or with the Regulatory Authorities referred
to in Section 3.04 hereof and compliance with any conditions contained
therein, and the approval of this Agreement and the Plan of Merger by the
requisite vote of the shareholders of Primary Bank, and by the requisite
vote of the Primary Bank Board of Directors, no consents, waivers or
approvals of, or filings or registrations with, any governmental authority
are necessary, and, to Primary Bank's knowledge, no consents, waivers or
approvals of, or filings or registrations with, any other third parties are
necessary, in connection with (a) the execution and delivery of this
Agreement or the Plan of Merger by Primary Bank, and (b) the completion by
Primary Bank of the transactions contemplated hereby or by the Plan of
Merger.
Section 2.05 Financial Statements.
(a) Primary Bank has previously delivered to Granite State the Primary
Bank Regulatory Reports. The Primary Bank Regulatory Reports have been, or
will be, prepared in all material respects in accordance with applicable
regulatory accounting principles and practices throughout the periods
covered by such statements, and fairly present, or will fairly present in
all material respects, the consolidated financial position, results of
operations and changes in shareholders' equity of Primary Bank as of and for
the periods ended on the dates thereof, in accordance with applicable
regulatory accounting principles applied on a consistent basis.
(b) Primary Bank has previously delivered to Granite State the Primary
Bank Financials. The Primary Bank Financials have been, or will be, prepared
in accordance with GAAP, and (including the related notes where applicable)
fairly present, or will fairly present, in each case in all material
respects (subject in the case of the unaudited interim statements to normal
year-end adjustments), the consolidated financial position, results of
operations and cash flows of Primary Bank and the Primary Bank Subsidiaries
as of and for the respective periods ending on the dates thereof, in
accordance with GAAP applied on a consistent basis during the periods
involved, except as indicated in the notes thereto, or in the case of
unaudited statements, as permitted by Form F-4.
(c) At the date of each balance sheet included in the Primary Bank
Financials or the Primary Bank Regulatory Reports, Primary Bank did not
have, or will not have any liabilities, obligations or loss contingencies of
any nature (whether absolute, accrued, contingent or otherwise) of a type
required to be reflected in such Primary Bank Financials or Primary Bank
Regulatory Reports or in the footnotes thereto which are not fully reflected
or reserved against therein or fully disclosed in a footnote thereto, except
for liabilities, obligations and loss contingencies which are not material
individually or in the aggregate and which are incurred in the ordinary
course of business, consistent with past practice and except for
liabilities,
<PAGE> A--12
obligations and loss contingencies which are within the subject matter of a
specific representation and warranty herein and subject, in the case of any
unaudited statements, to normal, recurring audit adjustments and the absence
of footnotes.
Section 2.06 Taxes. Primary Bank and the Primary Bank Subsidiaries are
members of the same affiliated group within the meaning of IRC Section
1504(a). Primary Bank has duly filed all federal, state and material local
tax returns required to be filed by or with respect to Primary Bank and all
Primary Bank Subsidiaries on or prior to the Closing Date (all such returns
being accurate and correct in all material respects) and has duly paid or
will pay, or made or will make, provisions for the payment of all material
federal, state and local taxes which have been incurred by or are due or
claimed to be due from Primary Bank and any Primary Bank Subsidiary by any
taxing authority or pursuant to any written tax sharing agreement on or
prior to the Closing Date other than taxes or other charges which (i) are
not delinquent, (ii) are being contested in good faith, or (iii) have not
yet been fully determined.
Section 2.07. No Material Adverse Effect. Primary Bank and the Primary
Bank Subsidiaries, taken as a whole, have not suffered any Material Adverse
Effect since December 31, 1996.
Section 2.08. Contracts.
(a) Except as described in the footnotes to the audited consolidated
financial statements of Primary Bank as of December 31, 1996, and for the
three years ended December 31, 1996, or in Primary Bank Disclosure Schedule
2.08(a), neither Primary Bank nor any Primary Bank Subsidiary is a party to
or subject to: (i) any employment, consulting or severance contract or
material arrangement with any past or present officer, director or employee
of Primary Bank or any Primary Bank Subsidiary, except for "at will"
arrangements; (ii) any plan, material arrangement or contract providing for
bonuses, pensions, options, deferred compensation, retirement payments,
profit sharing or similar material arrangements for or with any past or
present officers, directors or employees of Primary Bank or any Primary Bank
Subsidiary; (iii) any collective bargaining agreement with any labor union
relating to employees of Primary Bank or any Primary Bank Subsidiary; (iv)
any agreement which by its terms limits the payment of dividends by Primary
Bank; (v) any instrument evidencing or related to material indebtedness for
borrowed money whether directly or indirectly, by way of purchase money
obligation, conditional sale, lease purchase, guaranty or otherwise, in
respect of which Primary Bank or any Primary Bank Subsidiary is an obligor
to any person, which instrument evidences or relates to indebtedness other
than deposits, repurchase agreements, Primary Bank acceptances, Federal Home
Loan Bank of Boston advances, and "treasury tax and loan" accounts
established in the ordinary course of business and transactions in "federal
funds" or which contains financial covenants or other restrictions (other
than those relating to the payment of principal and interest when due) which
would be applicable on or after the Closing Date to Granite State or any
Granite State Subsidiary; or (vi) any contract (other than this Agreement)
limiting the freedom, in any material respect, of Primary Bank to engage in
any type of banking or bank-related business which Primary Bank is permitted
to engage in under applicable law as of the date of this Agreement.
(b) True and correct copies of agreements, plans, arrangements and
instruments referred to in Section 2.08(a), have been provided to Granite
State on or before the date hereof, are listed on Primary Bank Disclosure
Schedule 2.08(a) and are in full force and effect on the date hereof and
neither Primary Bank nor any Primary Bank Subsidiary (nor, to the knowledge
of Primary Bank, any other party to any such contract, plan, arrangement or
instrument) has breached any provision of, or is in default in any respect
under any term of, any such contract, plan, arrangement or instrument which
breach has resulted in or will result in a Material Adverse Effect with
respect to Primary Bank. Except as set forth in the Primary Bank Disclosure
Schedule 2.08(b), no party to any material contract, plan, arrangement or
instrument will have the right to terminate any or all of the
<PAGE> A--13
provisions of any such contract, plan, arrangement or instrument as a result
of the execution of, and the transactions contemplated by, this Agreement.
Except as set forth in Primary Bank Disclosure Schedule 2.08(b), none of the
employees (including officers) of Primary Bank, possess the right to
terminate their employment as a result of the execution of this Agreement.
Except as set forth in Primary Bank Disclosure Schedule 2.08(b), no plan,
employment agreement, termination agreement, or similar agreement or
arrangement to which Primary Bank or any Primary Bank Subsidiary is a party
or under which Primary Bank or any Primary Bank Subsidiary may be liable
contains provisions which permit an employee or independent contractor to
terminate it without cause and continue to accrue future benefits
thereunder. Except as set forth in Primary Bank Disclosure Schedule 2.08(b),
no such agreement, plan or arrangement (x) provides for acceleration in the
vesting of benefits or payments due thereunder upon the occurrence of a
change in ownership or control of Primary Bank or any Primary Bank
Subsidiary absent the occurrence of a subsequent event; or (y) requires
Primary Bank or any Primary Bank Subsidiary to provide a benefit in the form
of Primary Bank Common Stock or determined by reference to the value of
Primary Bank Common Stock. No such agreement, plan or arrangement with
respect to officers of Primary Bank, or to Primary Bank's knowledge, to its
employees, provides for benefits which may cause the disallowance of a
federal income tax deduction under IRC Section 280G. No limited rights (as
such term is defined in the Primary Bank stock option plans identified in
Disclosure Schedule 2.08(a)) have been granted with respect to any employee
or director stock option that is outstanding as of the date of this
Agreement.
Section 2.09 Ownership of Property; Insurance Coverage.
(a) Except as disclosed in Primary Bank Disclosure Schedule 2.09,
Primary Bank and the Primary Bank Subsidiaries have good and, as to real
property, marketable title to all material assets and properties owned by
Primary Bank or any Primary Bank Subsidiary in the conduct of their
businesses, whether such assets and properties are real or personal,
tangible or intangible, including assets and property reflected in the
balance sheets contained in the Primary Bank Regulatory Reports and in the
Primary Bank Financials or acquired subsequent thereto (except to the extent
that such assets and properties have been disposed of in the ordinary course
of business, since the date of such balance sheets), subject to no material
encumbrances, liens, mortgages, security interests or pledges, except (i)
those items which secure liabilities for public or statutory obligations or
any discount with, borrowing from or other obligations to any Federal
Reserve Bank or any Federal Home Loan Bank, inter-bank credit facilities, or
any transaction by a Primary Bank Subsidiary acting in a fiduciary capacity,
(ii) statutory liens for amounts not yet delinquent or which are being
contested in good faith, and (iii) items permitted under Article IV. Primary
Bank and the Primary Bank Subsidiaries, as lessee, have the right under
valid and subsisting leases of real and personal properties used by Primary
Bank and its Subsidiaries in the conduct of their businesses to occupy or
use all such properties as presently occupied and used by each of them.
Except as disclosed in Primary Bank Disclosure Schedule 2.09, such existing
leases and commitments to lease constitute or will constitute operating
leases for both tax and financial accounting purposes and the lease expense
and minimum rental commitments with respect to such leases and lease
commitments are as disclosed in the Notes to the Primary Bank Financials.
(b) With respect to all material agreements pursuant to which Primary
Bank or any Primary Bank Subsidiary has purchased securities subject to an
agreement to resell, if any, Primary Bank or such Primary Bank Subsidiary,
as the case may be, has a lien or security interest (which to Primary Bank's
knowledge is a valid, perfected first lien) in the securities or other
collateral securing the repurchase agreement, and the value of such
collateral equals or exceeds the amount of the debt secured thereby.
(c) Primary Bank currently maintains insurance considered by Primary
Bank to be reasonable for their respective operations and similar in scope
and coverage to that customarily maintained by other businesses similarly
engaged in a similar location, in accordance with good business practice.
Primary Bank
<PAGE> A--14
has not received notice from any insurance carrier that (i) such insurance
will be canceled or that coverage thereunder will be reduced or eliminated,
or (ii) premium costs with respect to such policies of insurance will be
substantially increased. There are presently no material claims pending
under such policies of insurance and no notices have been given by Primary
Bank under such policies. All such insurance is valid and enforceable and in
full force and effect, and within the last three years Primary Bank has
received each type of insurance coverage for which it has applied and during
such periods has not been denied indemnification for any material claims
submitted under any of its insurance policies.
Section 2.10 Legal Proceedings. Except as disclosed in Primary Bank
Disclosure Schedule 2.10, neither Primary Bank nor any Primary Bank
Subsidiary is a party to any, and there are no pending or, to the best of
Primary Bank's knowledge, threatened legal, administrative, arbitration or
other proceedings, claims (whether asserted or unasserted), actions or
governmental investigations or inquiries of any nature (i) against Primary
Bank or any Primary Bank Subsidiary, (ii) to which Primary Bank or any
Primary Bank Subsidiary's assets are or may be subject, (iii) challenging
the validity or propriety of any of the transactions contemplated by this
Agreement, or (iv) which could adversely affect the ability of Primary Bank
to perform under this Agreement, except for any proceedings, claims,
actions, investigations or inquiries referred to in clauses (i) or (ii)
which, if adversely determined, individually or in the aggregate, could not
be reasonably expected to have a Material Adverse Effect on Primary Bank and
the Primary Bank Subsidiaries, taken as a whole.
Section 2.11 Compliance With Applicable Law.
(a) Primary Bank and Primary Bank Subsidiaries hold all licenses,
franchises, permits and authorizations necessary for the lawful conduct of
their respective businesses under, and have complied in all material
respects with, applicable laws, statutes, orders, rules or regulations of
any federal, state or local governmental authority relating to them, other
than where such failure to hold or such noncompliance will neither result in
a limitation in any material respect on the conduct of their respective
businesses nor otherwise have a Material Adverse Effect on Primary Bank and
the Primary Bank Subsidiaries, taken as a whole.
(b) Except as disclosed in Primary Bank Disclosure Schedule 2.11,
neither Primary Bank nor any Primary Bank Subsidiary has received any
notification or communication from any Regulatory Authority (i) asserting
that Primary Bank or any Primary Bank Subsidiary is not in material
compliance with any of the statutes, regulations or ordinances which such
Regulatory Authority enforces; (ii) threatening to revoke any license,
franchise, permit or governmental authorization which is material to Primary
Bank or any Primary Bank Subsidiary; (iii) requiring or threatening to
require Primary Bank or any Primary Bank Subsidiary, or indicating that
Primary Bank or any Primary Bank Subsidiary may be required, to enter into a
cease and desist order, agreement or memorandum of understanding or any
other agreement with any federal or state governmental agency or authority
which is charged with the supervision or regulation of banks or engages in
the insurance of bank deposits restricting or limiting, or purporting to
restrict or limit, in any material respect the operations of Primary Bank or
any Primary Bank Subsidiary, including without limitation any restriction on
the payment of dividends; or (iv) directing, restricting or limiting, or
purporting to direct, restrict or limit, in any manner the operations of
Primary Bank or any Primary Bank Subsidiary, including without limitation
any restriction on the payment of dividends (any such notice, communication,
memorandum, agreement or order described in this sentence is hereinafter
referred to as a "Regulatory Agreement"). Neither Primary Bank nor any
Primary Bank Subsidiary has consented to or entered into any currently
effective Regulatory Agreement, except as set forth in Primary Bank
Disclosure Schedule 2.11.
Section 2.12 ERISA. Primary Bank has previously delivered to Granite
State true and complete copies of all employee pension benefit plans within
the meaning of ERISA Section 3(2), profit sharing plans, stock purchase
plans, deferred compensation and supplemental income plans, supplemental
executive retirement
<PAGE> A--15
plans, employment agreements, annual or long term incentive plans,
settlement plans, policies and agreements, group insurance plans, and all
other employee welfare benefit plans within the meaning of ERISA Section
3(1) (including vacation pay, sick leave, short-term disability, long-term
disability, and medical plans) and all other employee benefit plans,
policies, agreements and arrangements, all of which are set forth in Primary
Bank Disclosure Schedule 2.12, maintained or contributed to for the benefit
of the employees or former employees (including retired employees) and any
beneficiaries thereof or directors or former directors of Primary Bank or
any Primary Bank Subsidiary, together with (i) the most recent actuarial (if
any) and financial reports relating to those plans which constitute
"qualified plans" under IRC Section 401(a), (ii) the most recent annual
reports relating to such plans filed by them, respectively, with any
government agency, and (iii) all rulings and determination letters which
pertain to any such plans. Neither Primary Bank nor any Primary Bank
Subsidiary maintains or has maintained within the last six (6) years any
pension plan subject to Title IV of ERISA. Neither Primary Bank, any Primary
Bank Subsidiary nor any other pension plan maintained by Primary Bank or any
Primary Bank Subsidiary, has incurred, directly or indirectly, within the
past six (6) years any liability to the IRS with respect to any pension plan
qualified under IRC Section 401(a) which liability has resulted in or will
result in a Material Adverse Effect with respect to Primary Bank. Neither
Primary Bank nor any Primary Bank Subsidiary has incurred or is subject to
any liability under ERISA Section 4201 for a complete or partial withdrawal
from a multi-employer plan. All "employee benefit plans," as defined in
ERISA Section 3(3), comply and within the past six (6) years have complied
in all material respects with (i) relevant provisions of ERISA and (ii) in
the case of plans intended to qualify for favorable income tax treatment,
provisions of the IRC relevant to such treatment. No prohibited transaction
(which shall mean any transaction prohibited by ERISA Section 406 and not
exempt under ERISA Section 408 or any transaction prohibited under IRC
Section 4975) has occurred within the past six (6) years with respect to any
employee benefit plan maintained by Primary Bank or any Primary Bank
Subsidiary which would result in the imposition, directly or indirectly, of
an excise tax under IRC 4975 or other penalty under ERISA or the IRC, which,
individually or in the aggregate, has resulted in or will result in a
Material Adverse Effect with respect to Primary Bank. Primary Bank and the
Primary Bank Subsidiaries provide continuation coverage under group health
plans for separating employees and "qualified beneficiaries" in accordance
with the provisions of IRC Section 4980B(f). Such group health plans are in
compliance in all material respects with Section 1862(b)(1) of the Social
Security Act. With respect to the outstanding loan to Primary Bank's
employee stock ownership plan, as of March 31, 1997, the principal amount
outstanding does not exceed $300,000.
Section 2.13 Brokers, Finders and Financial Advisors. Except for
Primary Bank's engagement of Northeast Capital and Advisory, Inc.
("Northeast Capital") in connection with transactions contemplated by this
Agreement, neither Primary Bank nor any Primary Bank Subsidiary, nor any of
their respective officers, directors, employees or agents, has employed any
broker, finder or financial advisor in connection with the transactions
contemplated by this Agreement or the Plan of Merger, or, except for its
commitments disclosed in Primary Bank Disclosure Schedule 2.13, incurred any
liability or commitment for any fees or commissions to any such person in
connection with the transactions contemplated by this Agreement or the Plan
of Merger, which has not been reflected in the Primary Bank Financials.
Section 2.14. Environmental Matters. To the knowledge of Primary Bank,
neither Primary Bank nor any Primary Bank Subsidiary, nor any properties
owned or operated by Primary Bank or any Primary Bank Subsidiary has been or
is in violation of or liable under any Environmental Law which violation or
liability, individually or in the aggregate, has resulted, or will result,
in a Material Adverse Effect with respect to Primary Bank and its
Subsidiaries taken as a whole. There are no actions, suits or proceedings,
or demands, claims, notices or, to Primary Bank's knowledge, investigations
(including without limitation notices, demand letters or requests for
information from any environmental agency) instituted or pending, or to the
knowledge of Primary Bank, threatened, relating to the liability of any
property owned or operated by Primary Bank or
<PAGE> A--16
any Primary Bank Subsidiary under any Environmental Law. Primary Bank
Disclosure Schedule 2.14 identifies all material reports, studies, sampling
data, permits, and governmental filings in the possession of or reasonably
available to Primary Bank or any Primary Bank Subsidiary concerning the
Environmental Laws and Primary Bank or any Primary Bank Subsidiary or any of
their current or former properties or operations.
Section 2.15. Loan Portfolio. The allowance for loan losses reflected,
and to be reflected, in the Primary Bank Regulatory Reports, and shown, and
to be shown, on the balance sheets contained in the Primary Bank Financials
have been, and will be, established in accordance with the requirements of
GAAP and all applicable regulatory criteria. Primary Bank Disclosure
Schedule 2.15 sets forth all loans that are classified by Primary Bank or
any state or federal bank regulatory or supervisory authority as "Special
Mention," "Substandard," "Doubtful," "Loss" or "Classified," together with
the aggregate principal amount of and accrued and unpaid interest on such
loans, by category.
Section 2.16. Information to be Supplied. The information to be
supplied by Primary Bank for inclusion in any Registration Statement or
Proxy Statement will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act or the Proxy Statement is mailed,
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein not
misleading. The information supplied, or to be supplied, by Primary Bank for
inclusion in the Applications will, at the time such documents are filed
with any Regulatory Authority, be accurate in all material aspects.
Section 2.17. Securities Documents. Primary Bank has delivered to
Granite State copies of its (i) annual reports on Form F-2 for the years
ended December 31, 1996, 1995 and 1994, (ii) quarterly reports on Form F-4
for the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996
and (iii) proxy materials used or for use in connection with its meetings of
shareholders held in 1996, 1995 and 1994. Such reports and such proxy
materials complied, at the time filed with the FDIC, in all material
respects, with the FDIC rules and regulations under the Exchange Act.
Section 2.18. Related Party Transactions. Except as disclosed in
Primary Bank Disclosure Schedule 2.18, or as described in Primary Bank's
Proxy Statement distributed in connection with the 1997 annual meeting of
shareholders (which has previously been provided to Granite State), Primary
Bank is not a party to any transaction (including any loan or other credit
accommodation) with any Affiliate of Primary Bank (except a Primary Bank
Subsidiary). Except as disclosed in Primary Bank Disclosure Schedule 2.18,
all such transactions (a) were made in the ordinary course of business, (b)
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other Persons, and (c) did not involve more than the normal risk of
collectability or present other unfavorable features. Except as set forth on
Primary Bank Disclosure Schedule 2.18, no loan or credit accommodation to
any Affiliate of Primary Bank is presently in default or, during the three
year period prior to the date of this Agreement, has been in default or has
been restructured, modified or extended. Primary Bank has not been notified
that principal and interest with respect to any such loan or other credit
accommodation will not be paid when due or that the loan grade
classification accorded such loan or credit accommodation by Primary Bank is
inappropriate.
Section 2.19. Schedule of Termination Benefits. Primary Bank
Disclosure Schedule 2.19 includes a schedule of all termination benefits and
related payments that would be payable to the individuals identified
thereon, excluding any options to acquire Primary Bank Common Stock granted
to such individuals, under any and all employment agreements, special
termination agreements, supplemental executive retirement plans, deferred
bonus plans, deferred compensation plans, salary continuation plans, or any
compensation arrangement, or other pension benefit or welfare benefit plan
maintained by Primary Bank solely for the benefit
<PAGE> A--17
of officers or directors of Primary Bank or Primary Bank Subsidiaries (the
"Benefits Schedule"), assuming their employment or service is terminated as
of December 31, 1997 and the Closing Date occurs prior to such termination.
No other individuals are entitled to benefits under any such plans.
Section 2.20. Loans. Each loan reflected as an asset in the Primary
Bank Financial Statements (i) is evidenced by notes, agreements or other
evidences of indebtedness which are true, genuine and correct in all
material respects, (ii) to the extent secured, to Primary Bank's knowledge
has been secured by valid liens and security interests which have to Primary
Bank's knowledge been perfected, and (iii) is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent conveyance and other
laws of general applicability relating to or affecting creditors' rights and
to general equity principles, in each case other than loans as to which the
failure to satisfy the foregoing standards would not have a Material Adverse
Effect on Primary Bank and the Primary Bank Subsidiaries taken as a whole.
Section 2.21. Antitakeover Provisions Inapplicable. Except as set
forth on Primary Bank Disclosure Schedule 2.21, the transactions
contemplated by this Agreement are not subject to any applicable state
takeover law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF GRANITE STATE
Granite State represents and warrants to Primary Bank that the
statements contained in this Article III are correct and complete as of the
date of this Agreement and will be correct and complete as of the Closing
Date (as though made then and as though the Closing Date were substituted
for the date of this Agreement throughout this Article III), except as set
forth in the Granite State Disclosure Schedules delivered by Granite State
to Primary Bank on the date hereof. Granite State has made a good faith
effort to ensure that the disclosure on each schedule of the Granite State
Disclosure Schedules corresponds to the section reference herein. However,
for purposes of the Granite State Disclosure Schedules, any item disclosed
on any schedule therein is deemed to be fully disclosed with respect to all
schedules under which such item may be relevant.
Section 3.01. Organization.
(a) Granite State is a duly organized corporation, validly existing
and in good standing under the laws of New Hampshire, with full corporate
power and authority to carry on its business as now conducted and is duly
licensed or qualified to do business in the states of the United States and
foreign jurisdictions where its ownership or leasing of property or the
conduct of its business requires such qualification, except where the
failure to be so licensed or qualified would not have a Material Adverse
Effect on Granite State. Granite State is registered as a bank holding
company under the BHC Act. Granite State has made available to Primary Bank
true and correct copies of its articles of agreement and bylaws.
(b) Granite Bank is duly organized and validly existing as a bank
under the laws of the State of New Hampshire. Granite Bank has the corporate
power and authority to carry on its business and operations as now being
conducted, and to own and operate the properties and assets now owned and
being operated by it, and is duly licensed or qualified to do business in
the states of the United States and foreign jurisdictions where its
ownership or leasing of property or the conduct of its business requires
such qualification, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect on Granite State.
(c) The deposits of Granite Bank are insured by the FDIC to the
maximum extent provided in the FDIA, and Granite Bank has paid all premium
assessments that have come due and has filed all reports required
<PAGE> A--18
by the FDIA. Granite Bank is a member in good standing of the Federal Home
Loan Bank of Boston and owns the requisite amount of stock therein.
(d) Except as disclosed in Granite State Disclosure Schedule 3.01(d),
the respective minute books of Granite State and Granite Bank accurately
record in all material respects all material corporate action of their
respective shareholders and boards of directors (including committees)
through the date of this Agreement.
(e) Prior to the date of this Agreement, Granite State has delivered
to Primary Bank true and correct copies of the articles of agreement and the
bylaws of Granite State and Granite Bank, respectively, as in effect on the
date hereof.
Section 3.02 Capitalization.
(a) The authorized capital stock of Granite State consists of (a)
12,500,000 shares of common stock, par value $1.00 per share ("Granite State
Common Stock"), of which, at the date of this Agreement, 2,632,473 shares
are validly issued, fully paid and nonassessable and 613,457 shares are held
by Granite State as treasury stock, and (b) 7,500,000 shares of preferred
stock, par value $1.00 per share, of which, at the date of this Agreement,
no shares of were issued and outstanding. No shares of Granite State Common
Stock were issued in violation of any preemptive rights. Granite State has
no Rights authorized, issued or outstanding, other than (i) options to
acquire 258,160 shares of Granite State Common Stock are reserved for
issuance and authorized under Granite State's employee benefit plans and
stock option plans, and (ii) shares issuable as a result of the 3-for-2
stock split to be paid by Granite State on May 9, 1997.
(b) To Granite State's knowledge, except as disclosed in Granite
State's proxy statement dated March 24, 1997, no Person or "group" (as that
term is used in Section 13(d)(3) of the Exchange Act) is the beneficial
owner (as defined in Section 13(d) of the Exchange Act) of 5% or more of the
outstanding shares of Granite State Common Stock.
(c) Granite State owns all of the capital stock of Granite Bank, free
and clear of any lien or encumbrance. Except for the Granite State
Subsidiaries, Granite State does not possess, directly or indirectly, any
material equity interest in any corporation, except for equity interests
held in the investment portfolios of Granite State Subsidiaries, equity
interests held by Granite State Subsidiaries in a fiduciary capacity, and
equity interests held in connection with the lending activities of Granite
State Subsidiaries.
Section 3.03 Authority; No Violation.
(a) Granite State has full corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. Granite Bank has full corporate power and authority to execute and
deliver the Plan of Merger and to consummate the Bank Merger. The execution
and delivery of this Agreement by Granite State and the completion by
Granite State of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of Granite State and, except for
approval of the shareholders of Granite State, no other corporate
proceedings on the part of Granite State are necessary to complete the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Granite State and, subject to approval by the
shareholders of Granite State and receipt of the required approvals of
Regulatory Authorities described in Section 3.04 hereof, constitutes the
valid and binding obligation of Granite State and Granite Bank, enforceable
against Granite State and Granite Bank in accordance with its terms, subject
to applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally, and as to Granite Bank, the conservatorship or
receivership provisions of the FDIA, and subject, as to enforceability, to
general principles of equity. The Plan of Merger, upon its execution and
<PAGE> A--19
delivery by Granite Bank concurrently with the execution and delivery of
this Agreement, will constitute the valid and binding obligation of Granite
Bank, enforceable against Granite Bank in accordance with its terms, subject
to applicable conservatorship and receivership provisions of the FDIA, or
insolvency and similar laws affecting creditors' rights generally and
subject, as to enforceability, to general principles of equity.
(b)(A) The execution and delivery of this Agreement by Granite State
and Granite Bank, (B) the execution and delivery of the Plan of Merger by
Granite Bank, (C) subject to receipt of approvals from the Regulatory
Authorities referred to in Section 3.04 hereof and Primary Bank's and
Granite State's compliance with any conditions contained therein, the
consummation of the transactions contemplated hereby, and (D) compliance by
Granite State or Granite Bank with any of the terms or provisions hereof or
of the Plan of Merger will not (i) conflict with or result in a breach of
any provision of the articles of agreement or bylaws of Granite State or any
Granite State Subsidiary or the articles of agreement and bylaws of Granite
Bank; (ii) violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to Granite State or any Granite
State Subsidiary or any of their respective properties or assets; or (iii)
violate, conflict with, result in a breach of any provisions of, constitute
a default (or an event which, with notice or lapse of time, or both, would
constitute a default), under, result in the termination of, accelerate the
performance required by, or result in a right of termination or acceleration
or the creation of any lien, security interest, charge or other encumbrance
upon any of the properties or assets of Granite State or Granite Bank under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other investment or
obligation to which Granite State or Granite Bank is a party, or by which
they or any of their respective properties or assets may be bound or
affected, except for such violations, conflicts, breaches or defaults under
clause (ii) or (iii) hereof which, either individually or in the aggregate,
will not have a Material Adverse Effect on Granite State.
Section 3.04. Consents. Except for consents, approvals, filings and
registrations from or with the Commissioner, the FRB, the FDIC and SEC, and
state "blue sky" authorities, and compliance with any conditions contained
therein, and the approval of this Agreement by the shareholders of Granite
State in accordance with Nasdaq requirements applicable to it, and the
approval of the Plan of Merger by Granite State as sole shareholder of
Granite Bank under the FDIA, and by the Granite Bank Board of Directors, the
filing of articles of merger with the Secretary of State of the State of New
Hampshire pursuant to the New Hampshire Revised Statutes Annotated, no
consents or approvals of, or filings or registrations with, any public body
or authority are necessary, and no consents or approvals of any third
parties are necessary, or will be, in connection with (a) the execution and
delivery of this Agreement by Granite State or the Plan of Merger by Granite
Bank, and (b) the completion by Granite State of the transactions
contemplated hereby or by Granite Bank of the Bank Merger. Granite State has
no reason to believe that (i) any required consents or approvals will not be
received or will be received with conditions, limitations or restrictions
unacceptable to it or which would adversely impact Granite State's ability
to complete the transactions contemplated by this Agreement or that (ii) any
public body or authority, the consent or approval of which is not required
or any filing with which is not required, will object to the completion of
the transactions contemplated by this Agreement.
Section 3.05. Financial Statements.
(a) Granite State has previously delivered, or will deliver, to
Primary Bank the Granite State Regulatory Reports. The Granite State
Regulatory Reports have been, or will be, prepared in accordance with
applicable regulatory accounting principles and practices and fairly
present, or will fairly present, the consolidated financial position,
results of operations and changes in shareholders' equity of Granite State
as of and for the periods ending on the dates thereof, in accordance with
applicable regulatory accounting principles. Granite State will make the
Granite State Regulatory Reports available to Primary Bank for inspection.
<PAGE> A--20
(b) Granite State has previously delivered to Primary Bank the Granite
State Financials. The Granite State Financials have been, or will be,
prepared in accordance with GAAP and practices applied on a consistent basis
throughout the periods covered by such statements, and (including the
related notes where applicable) fairly present, or will fairly present
(subject in the case of the unaudited interim statements to normal year-end
adjustments), the consolidated financial position, results of operations and
cash flows of Granite State and the Granite State Subsidiaries as of and for
the respective periods ending on the dates thereof, in accordance with GAAP
applied on a consistent basis during the periods involved, except as
indicated in the notes thereto, or in the case of unaudited statements, as
permitted by Form 10-Q.
(c) At the date of each balance sheet included in the Granite State
Financials, Granite State did not have any liabilities, obligations or loss
contingencies of any nature (whether absolute, accrued, contingent or
otherwise) of a type required to be reflected in such Granite State
Financials or in the footnotes thereto which are not fully reflected or
reserved against therein or disclosed in a footnote thereto, except for
liabilities, obligations or loss contingencies which are not material in the
aggregate and which are incurred in the ordinary course of business,
consistent with past practice, and except for liabilities, obligations or
loss contingencies which are within the subject matter of a specific
representation and warranty herein and subject, in the case of any unaudited
statements, to normal recurring audit adjustments and the absence of
footnotes.
Section 3.06. Taxes. Granite State and the Granite State Subsidiaries
are members of the same affiliated group within the meaning of IRC Section
1504(a). Granite State has duly filed, and will file, all federal, state and
local tax returns required to be filed by or with respect to Granite State
and all Granite State Subsidiaries on or prior to the Closing Date (all such
returns being accurate and correct in all material respects) and has duly
paid or will pay, or made or will make, provisions for the payment of all
federal, state and local taxes which have been incurred by or are due or
claimed to be due from Granite State and any Granite State Subsidiary by any
taxing authority or pursuant to any tax sharing agreement or arrangement
(written or oral) on or prior to the Closing Date other than taxes which (i)
are not delinquent or (ii) are being contested in good faith.
Section 3.07. No Material Adverse Effect. Granite State has not
suffered any Material Adverse Effect since December 31, 1996.
Section 3.08. Ownership of Property; Insurance Coverage.
(a) Granite State and the Granite State Subsidiaries have good and, as
to real property, marketable title to all material assets and properties
owned by Granite State or any of its Subsidiaries in the conduct of their
businesses, whether such assets and properties are real or personal,
tangible or intangible, including assets and property reflected in the
balance sheets contained in the Granite State Financials or acquired
subsequent thereto (except to the extent that such assets and properties
have been disposed of for fair value, in the ordinary course of business,
since the date of such balance sheets), subject to no material encumbrances,
liens, mortgages, security interests or pledges, except (i) those items that
secure liabilities for borrowed money and that are described in the Granite
State Disclosure Schedule or described in Section 4.01(v) of Article IV
hereof, and (ii) statutory liens for amounts not yet delinquent or which are
being contested in good faith. Granite State and the Granite State
Subsidiaries, as lessee, have the right under valid and subsisting leases of
real and personal properties used by Granite State and its Subsidiaries in
the conduct of their businesses to occupy and use all such properties as
presently occupied and used by each of them.
(b) Granite State and the Granite State Subsidiaries currently
maintain insurance in amounts considered by Granite State to be reasonable
for their respective operations, and such insurance is similar in scope and
coverage to that maintained by other businesses similarly engaged. Neither
Granite State nor any
<PAGE> A--21
Granite State Subsidiary has received notice from any insurance carrier that
(i) such insurance will be canceled or that coverage thereunder will be
reduced or eliminated or (ii) premium costs with respect to such insurance
will be substantially increased.
Section 3.09. Legal Proceedings. Neither Granite State nor any Granite
State Subsidiary is a party to any, and there are no pending or, to the best
of Granite State's knowledge, threatened legal, administrative, arbitration
or other proceedings, claims, actions or governmental investigations or
inquiries of any nature (i) against Granite State or any Granite State
Subsidiary, (ii) to which Granite State's or any Granite State Subsidiary's
assets are or may be subject, (iii) challenging the validity or propriety of
any of the transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of Granite State to perform under this
Agreement, except for any proceedings, claims, actions, investigations or
inquiries referred to in clauses (i) or (ii) which, individually or in the
aggregate, could not be reasonably expected to have a Material Adverse
Effect on Granite State and the Granite State Subsidiaries taken as a whole.
Section 3.10. Compliance With Applicable Law.
(a) Granite State and the Granite State Subsidiaries hold all
licenses, franchises, permits and authorizations necessary for the lawful
conduct of their businesses under, and have complied in all material
respects with, applicable laws, statutes, orders, rules or regulations of
any federal, state or local governmental authority relating to them, other
than where such failure to hold or such noncompliance will neither result in
a limitation in any material respect on the conduct of their businesses nor
otherwise have a Material Adverse Effect on the assets, business, financial
condition, business prospects or results of operations of Granite State and
its Subsidiaries taken as a whole.
(b) Neither Granite State nor any Granite State Subsidiary has
received any notification or communication from any Regulatory Authority (i)
asserting that Granite State or any Granite State Subsidiary is not in
compliance with any of the statutes, regulations or ordinances which such
Regulatory Authority enforces; (ii) threatening to revoke any license,
franchise, permit or governmental authorization which is material to Granite
State or any Granite State Subsidiary; (iii) requiring or threatening to
require Granite State or any Granite State Subsidiary, or indicating that
Granite State or any Granite State Subsidiary may be required, to enter into
a cease and desist order, agreement or memorandum of understanding or any
other agreement restricting or limiting, or purporting to restrict or limit,
in any manner the operations of Granite State or any Granite State
Subsidiary, including without limitation any restriction on the payment of
dividends; or (iv) directing, restricting or limiting, or purporting to
direct, restrict or limit, in any manner the operations of Granite State or
any Granite State Subsidiary, including without limitation any restriction
on the payment of dividends (any such notice, communication, memorandum,
agreement or order described in this sentence is hereinafter referred to as
a "Regulatory Agreement"). Neither Granite State nor any Granite State
Subsidiary is a party to, nor has consented to any Regulatory Agreement.
Section 3.11. Information to be Supplied. The information to be
supplied by Granite State for inclusion in any Registration Statement or
Proxy Statement will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act or the Proxy Statement is mailed,
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein not
misleading. The information supplied, or to be supplied, by Granite State
for inclusion in the Applications will, at the time such documents are filed
with any Regulatory Authority, be accurate in all material aspects.
Section 3.12. ERISA and Employment Arrangements. Granite State has
previously made available to Primary Bank true and complete copies of the
employee pension benefit plans within the meaning of ERISA Section 3(2),
profit sharing plans, stock purchase plans, deferred compensation and
supplemental income
<PAGE> A--22
plans, supplemental executive retirement plans, employment and special
termination agreements, annual incentive plans, group insurance plans, and
all other employee welfare benefit plans within the meaning of ERISA Section
3(1) (including vacation pay, sick leave, short-term disability, long-term
disability, and medical plans), and all other employee benefit plans,
policies, agreements and arrangements, all of which are set forth on the
Granite State Disclosure Schedule, maintained or contributed to for the
benefit of the employees or former employees (including retired employees)
and any beneficiaries thereof or directors or former directors of Granite
State or any Granite State Subsidiary, together with (i) the most recent
actuarial (if any) and financial reports relating to those plans which
constitute "qualified plans" under IRC Section 401(a), (ii) the most recent
annual reports relating to such plans filed by them, respectively, with any
government agency, and (iii) all rulings and determination letters which
pertain to any such plans. Neither Granite State nor any Granite State
Subsidiary, and no pension plan maintained by Granite State or any Granite
State Subsidiary, has incurred, directly or indirectly, within the past six
(6) years any liability under Title IV of ERISA (including to the Pension
Benefit Guaranty Corporation) or to the IRS with respect to any pension plan
qualified under IRC Section 401(a) which liability has resulted in or will
result in a Material Adverse Effect with respect to Granite State, except
liabilities to the Pension Benefit Guaranty Corporation pursuant to ERISA
Section 4007, all of which have been fully paid, nor has any reportable
event under ERISA Section 4043 occurred with respect to any such pension
plan. With respect to each of such plans that is subject to Title IV of
ERISA, the present value of the accrued benefits under such plan, based upon
the actuarial assumptions used for funding purposes in the plan's most
recent actuarial report did not, as of its latest valuation date, exceed the
then current value of the assets of such plan allocable to such accrued
benefits. Neither Granite State nor any Granite State Subsidiary has
incurred any liability under ERISA Section 4201 for a complete or partial
withdrawal from a multi-employer plan. All "employee benefit plans," as
defined in ERISA Section 3(3), comply and in the past six (6) years have
complied in all material respects with (i) relevant provisions of ERISA, and
(ii) in the case of plans intended to qualify for favorable income tax
treatment, provisions of the IRC relevant to such treatment. No prohibited
transaction (which shall mean any transaction prohibited by ERISA Section
406 and not exempt under ERISA Section 408 or any transaction prohibited
under IRC Section 4975) has occurred within the past six (6) years with
respect to any employee benefit plan maintained by Granite State or any
Granite State Subsidiary that would result in the imposition, directly or
indirectly, of an excise tax under IRC Section 4975 or other penalty under
ERISA or the IRC, which individually or in the aggregate, has resulted in or
will result in a Material Adverse Effect with respect to Granite State.
Granite State and the Granite State Subsidiaries provide continuation
coverage under group health plans for separating employees in accordance
with the provisions of IRC Section 4980B(f). Such group health plans are in
compliance with Section 1862(b)(1) of the Social Security Act.
Section 3.13. Securities Documents. Granite State has delivered, or
will deliver, to Primary Bank copies of its (i) annual reports on SEC Form
10-K for the years ended December 31, 1996, 1995, and 1994, (ii) quarterly
reports on SEC Form 10-Q for the quarters ended March 31, 1996, June 30,
1996 and September 30, 1996, and (iii) proxy statement dated March 24, 1997
used in connection with its annual meeting of shareholders held in April
1997. Such reports and such proxy materials complied, at the time filed with
the SEC, in all material respects, with the Exchange Act and the applicable
rules and regulations of the SEC.
Section 3.14. Environmental Matters. To the knowledge of Granite
State, neither Granite State nor any Granite State Subsidiary, nor any
properties owned or operated by Granite State or any Granite State
Subsidiary has been or is in violation of or liable under any Environmental
Law which violation or liability, individually or in the aggregate, has
resulted, or will result, in a Material Adverse Effect with respect to
Granite State and its Subsidiaries taken as a whole. There are no actions,
suits or proceedings, or demands, claims, notices or, to Granite State's
knowledge, investigations (including without limitation notices, demand
letters or requests for information from any environmental agency)
instituted or pending, or to the knowledge of Granite State, threatened,
relating to the liability of any property owned or operated by Granite State
or any Granite State Subsidiary under any Environmental Law.
<PAGE> A--23
Section 3.15. Loan Portfolio. The allowance for loan losses reflected,
and to be reflected, in the Granite State Regulatory Reports, and shown, and
to be shown, on the balance sheets contained in the Granite State Financials
have been, and will be, established in accordance with the requirements of
GAAP and all applicable regulatory criteria.
Section 3.16. Brokers, Finders and Financial Advisors. Except for
Granite State's engagement of Friedman, Billings, Ramsey & Co. ("FBR") in
connection with transactions contemplated by this Agreement, neither Granite
State nor any Granite State Subsidiary, nor any of their respective
officers, directors, employees or agents, has employed any broker, finder or
financial advisor in connection with the transactions contemplated by this
Agreement or the Plan of Merger, or, except for its commitments disclosed in
Granite State Disclosure Schedule 3.16, incurred any liability or commitment
for any fees or commissions to any such person in connection with the
transactions contemplated by this Agreement or the Plan of Merger, which has
not been reflected in the Granite State Financials.
Section 3.17. Loans. Each loan reflected as an asset in the Granite
State Financial Statements (i) is evidenced by notes, agreements or other
evidences of indebtedness which are true, genuine and correct (ii) to the
extent secured, has been secured by valid liens and security interests which
have been perfected, and (iii) is the legal, valid and binding obligation of
the obligor named therein, enforceable in accordance with its terms, subject
to bankruptcy, insolvency, fraudulent conveyance and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles, in each case other than loans as to which the failure to
satisfy the foregoing standards would not have a Material Adverse Effect on
Granite State. All loan transactions with Affiliates (a) were made in the
ordinary course of business, (b) were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other Persons, and (c) did not involve more
than the normal risk of collectability or present other unfavorable
features.
Section 3.18. Antitakeover Provisions Inapplicable. Except as set
forth on Granite State Disclosure Schedule 3.18, the transactions
contemplated by this Agreement are not subject to any applicable state
takeover law.
ARTICLE IV
COVENANTS OF THE PARTIES
Section 4.01. Conduct of Primary Bank's Business.
(a) From the date of this Agreement to the Closing Date, Primary Bank
will conduct its business and engage in transactions, including extensions
of credit, only in the ordinary course and consistent with past practice and
policies, except as otherwise required or contemplated by this Agreement or
with the written consent of Granite State. Primary Bank will use its
reasonable good faith efforts, to (i) preserve its business organizations
intact, (ii) maintain good relationships with employees, and (iii) preserve
for itself the good will of customers of Primary Bank and others with whom
business relationships exist. From the date hereof to the Closing Date,
except as otherwise consented to or approved by Granite State in writing or
as contemplated or required by this Agreement, Primary Bank will not, and
Primary Bank will not permit any Primary Bank Subsidiary to:
(i) amend or change any provision of its articles of agreement,
charter, or bylaws;
(ii) change the number of authorized or issued shares of its
capital stock or issue or grant any option, warrant, call, commitment,
subscription, Right or agreement of any character relating to its
authorized or issued capital stock or any securities convertible into
shares of such stock, or split,
<PAGE> A--24
combine or reclassify any shares of capital stock, or declare, set
aside or pay any dividend or other distribution in respect of capital
stock, or redeem or otherwise acquire any shares of capital stock,
except that (A) Primary Bank may issue shares of Primary Bank Common
Stock upon the valid exercise, in accordance with the information set
forth in Primary Bank Disclosure Schedule 2.02, of presently
outstanding options to acquire Primary Bank Common Stock under the
Primary Bank Stock Option Plans;
(iii) except pursuant to the arrangements set forth in Primary
Bank Disclosure Schedule 4.01, grant any severance or termination pay
(other than pursuant to written policies or written agreements of
Primary Bank in effect on the date hereof and provided to Granite
State prior to the date hereof) to, or enter into any new or amend any
existing employment agreement with, or increase the compensation of
(except for normal increases in the ordinary course of business
consistent in timing and amount with past practice), any employee,
officer or director of Primary Bank or any Primary Bank Subsidiary;
provided that Primary Bank, in its sole discretion, may enter
severance arrangements with, or adopt a severance policy with respect
to, employees or officers of Primary Bank in connection with
employment terminations to result from the Merger after the Effective
Date, provided that the total costs of such severance payments shall
not exceed $600,000 (excluding payments to be made pursuant to the
terms of employment or special termination agreements currently in
effect).
(iv) merge or consolidate Primary Bank or any Primary Bank
Subsidiary with any other corporation; sell or lease all or any
substantial portion of the assets or business of Primary Bank or any
Primary Bank Subsidiary; make any acquisition of all or any
substantial portion of the business or assets of any other person,
firm, association, corporation or business organization other than in
connection with foreclosures, settlements in lieu of foreclosure,
troubled loan or debt restructuring, or the collection of any loan or
credit arrangement between Primary Bank, or any Primary Bank
Subsidiary, and any other person; enter into a purchase and assumption
transaction with respect to deposits and liabilities; permit the
revocation or surrender by any Primary Bank Subsidiary of its
certificate of authority to maintain, or file an application for the
relocation of, any existing branch office, or file an application for
a certificate of authority to establish a new branch office;
(v) sell or otherwise dispose of the capital stock of Primary
Bank or sell or otherwise dispose of any asset of Primary Bank or of
any Primary Bank Subsidiary other than in the ordinary course of
business consistent with past practice; subject any asset of Primary
Bank or of any Primary Bank Subsidiary to a lien, pledge, security
interest or other encumbrance (other than in connection with deposits,
repurchase agreements, Primary Bank acceptances, advances from the
Federal Home Loan Bank of Boston, "treasury tax and loan" accounts
established in the ordinary course of business and transactions in
"federal funds" and the satisfaction of legal requirements in the
exercise of trust powers) other than in the ordinary course of
business consistent with past practice; incur any indebtedness for
borrowed money (or guarantee any indebtedness for borrowed money),
except in the ordinary course of business consistent with past
practice;
(vi) take any action which would result in any of the
representations and warranties of Primary Bank set forth in this
Agreement becoming untrue as of any date after the date hereof or in
any of the conditions set forth in Article V hereof not being
satisfied, except in each case as may be required by applicable law;
(vii) change any method, practice or principle of accounting,
except as may be required from time to time by GAAP (without regard to
any optional early adoption date) or any Regulatory Authority
responsible for regulating Primary Bank;
<PAGE> A--25
(viii) waive, release, grant or transfer any material rights of
value or modify or change in any material respect any existing
material agreement or indebtedness to which Primary Bank or any
Primary Bank Subsidiary is a party, other than in the ordinary course
of business, consistent with past practice;
(ix) implement any pension, retirement, profit sharing, bonus,
welfare benefit or similar plan or arrangement that was not in effect
on the date of this Agreement, or materially amend any existing plan
or arrangement except to the extent such amendments do not result in
an increase in cost; contribute to any pension, retirement, profit
sharing, bonus, welfare benefit or similar plan or arrangement other
than in amounts and in a manner consistent with past practice;
(x) purchase any security for its investment portfolio not rated
"A" or higher by either Standard & Poor's Corporation or Moody's
Investor Services, Inc.;
(xi) fail to review with a representative of Granite State on a
regular basis proposed loans or other credit facility commitments
(including without limitation, lines of credit and letters of credit,
but excluding loans to be secured by mortgages on one- to four-family
residential real estate) to any borrower or group of affiliated
borrowers in excess of $350,000, or any increase, compromise,
extension, renewal or modification of any existing loan or commitment
outstanding in excess of $350,000;
(xii) except as set forth on the Primary Bank Disclosure
Schedule, enter into, renew, extend or modify any other transaction
with any Affiliate;
(xiii) enter into any interest rate swap or similar commitment,
agreement or arrangement;
(xiv) except for the execution of this Agreement, take any
action that would give rise to a right of payment to any individual
under any employment agreement;
(xv) intentionally and knowingly take any action that would
preclude satisfaction of the condition to closing contained in Section
5.02(k) relating to financial accounting treatment of the Merger;
(xvi) change its lending, investment, asset/liability management
or other material banking policies in any material respect except as
may be required by changes in applicable law or regulations or in
response to examination comments by a Regulatory Authority; or
(xvii) agree to do any of the foregoing.
For purposes of this Section 4.01, unless provided for in a business
plan, budget or similar document delivered to Granite State prior to the
date of this Agreement, it shall not be considered in the ordinary course of
business for Primary Bank or any Primary Bank Subsidiary to do any of the
following: (i) make any capital expenditure of $50,000 or more not disclosed
on Primary Bank Disclosure Schedule 4.01, without the prior written consent
of Granite State; (ii) except as set forth in Primary Bank Disclosure
Schedule 4.01, make any sale, assignment, transfer, pledge, hypothecation or
other disposition of any assets having a book or market value, whichever is
greater, in the aggregate in excess of $1,000,000, other than pledges of
assets to secure government deposits, to exercise trust powers, sales of
assets received in satisfaction of debts previously contracted in the normal
course of business, issuance of loans, sales of previously purchased
government
<PAGE> A--26
guaranteed loans, or transactions in the investment securities portfolio by
Primary Bank or a Primary Bank Subsidiary or repurchase agreements made, in
each case, in the ordinary course of business; or (iii) undertake or enter
any lease, contract or other commitment for its account, other than in the
normal course of providing credit to customers as part of its banking
business, involving a payment by Primary Bank or any Primary Bank Subsidiary
of more than $50,000 annually, or containing a material financial commitment
and extending beyond 12 months from the date hereof.
Section 4.02. Access; Confidentiality.
(a) From the date of this Agreement through the Closing Date, Primary
Bank or Granite State, as the case may be, shall afford to, and shall cause
each Primary Bank Subsidiary or Granite State Subsidiary to afford to, the
other party and its authorized agents and representatives, access to their
respective properties, assets, books and records and personnel, during
normal business hours and after reasonable notice; and the officers of
Primary Bank and Granite State will furnish any person making such
investigation on behalf of the other party with such financial and operating
data and other information with respect to the businesses, properties,
assets, books and records and personnel as the person making such
investigation shall from time to time reasonably request. None of the
parties or their respective subsidiaries shall be required to provide access
to or to disclose information where such access or disclosure would violate
or prejudice the rights of their respective customers, jeopardize the
attorney-client privilege of the institution or company in possession or
control of such information or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered into prior to
the date of this Agreement. The parties hereto will make appropriate
substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply. The parties will hold all such
information delivered in confidence to the extent required by, and in
accordance with, the provisions of the confidentiality agreement, dated
April 7, 1997, among Primary Bank, Granite State and Granite Bank (the
"Confidentiality Agreement").
(b) Primary Bank and Granite State each agree to conduct such
investigation and discussions hereunder in a manner so as not to interfere
unreasonably with normal operations and customer and employee relationships
of the other party.
(c) In addition to the access permitted by subparagraph (a) above,
from the date of this Agreement through the Closing Date, Primary Bank shall
permit employees of Granite State reasonable access to information relating
to problem loans, loan restructurings and loan work-outs of Primary Bank.
Granite State shall have the right, however, at Granite State's expense, to
cause Primary Bank or any Primary Bank Subsidiary to obtain an appraisal by
an independent third party experienced in such matters, and mutually
satisfactory to Granite State and Primary Bank, of the assets or property
securing any loan made by Primary Bank or any Primary Bank Subsidiary,
provided that such appraisal does not unreasonably delay any such loan
restructuring or loan work-out.
(d) If the transactions contemplated by this Agreement shall not be
consummated, Primary Bank and Granite State will each destroy or return all
documents and records obtained from the other party or its representatives,
during the course of its investigation and will cause all information with
respect to the other party obtained pursuant to this Agreement or
preliminarily thereto to be kept confidential, except to the extent such
information becomes public through no fault of the party to whom the
information was provided or any of its representatives or agents and except
to the extent disclosure of any such information is legally required.
Primary Bank and Granite State shall each give prompt written notice to the
other party of any contemplated disclosure where such disclosure is so
legally required.
<PAGE> A--27
Section 4.03. Regulatory Matters and Consents.
(a) Granite State and Primary Bank will prepare all Applications and
make all filings for, and use their best efforts to obtain as promptly as
practicable after the date hereof, all necessary permits, consents,
approvals, waivers and authorizations of all Regulatory Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement.
(b) Primary Bank will furnish Granite State with all information
concerning Primary Bank and Primary Bank Subsidiaries as may be necessary or
advisable in connection with any Application or filing made by or on behalf
of Granite State to any Regulatory Authority in connection with the
transactions contemplated by this Agreement.
(c) Granite State and Primary Bank will promptly furnish each other
with copies of all material written communications to, or received by them
from any Regulatory Authority in respect of the transactions contemplated
hereby, except information which is filed by either party which is
designated as confidential.
(d) The parties hereto agree that they will consult with each other
with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Regulatory Authorities. Granite
State will furnish Primary Bank with (i) copies of all Applications prior to
filing with any Regulatory Authority and provide Primary Bank a reasonable
opportunity to suggest changes to such Applications, which suggested changes
Granite State may, in its reasonable discretion accept or reject, (ii)
copies of all Applications filed by Granite State and (iii) copies of all
documents filed by Granite State under the Securities Exchange Act of 1934,
as amended.
(e) Primary Bank will cooperate with Granite State in the foregoing
matters and will furnish Granite State with all information concerning
Primary Bank and Primary Bank Subsidiaries as may be necessary or advisable
in connection with any Application or filing (including any Registration
Statement and any report filed with the SEC) made by or on behalf of Granite
State to any Regulatory Authority in connection with the transactions
contemplated by this Agreement, and such information will be accurate and
complete in all material respects. In connection therewith, Primary Bank
will provide certificates and other documents reasonably requested by
Granite State.
Section 4.04. Taking of Necessary Action.
(a) Granite State and Primary Bank shall each use its best efforts in
good faith, and each of them shall cause its Subsidiaries to use their best
efforts in good faith, to (i) furnish such information as may be required in
connection with the preparation of the documents referred to in Section 4.03
of this Agreement, and (ii) take or cause to be taken all action necessary
or desirable on its part using its best efforts so as to permit completion
of the Merger including, without limitation, (A) obtaining the consent or
approval of each individual, partnership, corporation, association or other
business or professional entity whose consent or approval is required or
desirable for consummation of the transactions contemplated hereby
(including assignment of leases without any change in terms), provided that
neither Primary Bank nor any Primary Bank Subsidiary shall agree to make any
payments or modifications to agreements in connection therewith without the
prior written consent of Granite State, and (B) requesting the delivery of
appropriate opinions, consents and letters from its counsel and independent
auditors. No party hereto shall take, or cause, or to the best of its
ability permit to be taken, any action that would substantially impair the
prospects of completing the Merger pursuant to this Agreement and the Plan
of Merger; provided that nothing herein contained shall preclude Granite
State or Primary Bank from exercising its rights under this Agreement or the
Option Agreement.
<PAGE> A--28
(b) Granite State shall promptly prepare, subject to the review and
consent of Primary Bank with respect to matters relating to the transactions
contemplated by this Agreement, a Prospectus/Proxy Statement to be filed by
Granite State with the SEC (unless Granite State and Primary Bank shall
agree that such filing with the SEC is not required) and to be mailed to
their respective shareholders in connection with the meetings of their
respective shareholders and transactions contemplated hereby, which
Prospectus/Proxy statement shall conform to all applicable legal
requirements. Granite State shall, as promptly as practicable following the
preparation thereof, file a Registration Statement with the SEC and Primary
Bank and Granite State shall use all reasonable efforts to have the
Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing, provided that such filing with
the SEC shall not be required if the SEC staff confirms the views of Granite
State that the proposed issuance of shares is exempt from registration under
the Securities Act. Granite State will advise Primary Bank, promptly after
Granite State receives notice thereof, if any, of the time when any
Registration Statement has become effective or any supplement or amendment
has been filed, of the issuance of any stop order or the suspension of the
qualification of the shares of capital stock issuable pursuant to the
Registration Statement, or the initiation or threat of any proceeding for
any such purpose, or of any request by the SEC for the amendment or
supplement of the Registration Statement or for additional information.
Granite State shall use its best efforts to obtain, prior to the effective
date of the Registration Statement, all necessary state securities laws or
"Blue Sky" permits and approvals required to carry out the transactions
contemplated by this Agreement. Granite State will provide Primary Bank with
as many copies of such Registration Statement and all amendments thereto
promptly upon the filing thereof as Primary Bank may reasonably request.
Section 4.05. Certain Agreements.
(a) From and after the Effective Time through the sixth anniversary
thereof, Granite State agrees to indemnify, defend and hold harmless each
present and former director and officer of Primary Bank and its Subsidiaries
determined as of the Closing Date (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including reasonable attorneys'
fees and expenses), liabilities, judgments or amounts paid in settlement
(with the approval of Granite State, which approval shall not be
unreasonably withheld) or in connection with any claim, action, suit,
proceeding or investigation arising out of matters existing or occurring at
or prior to the Effective Time (a "Claim") in which an Indemnified Party is,
or is threatened to be made, a party or a witness based in whole or in part
on, or arising in whole or in part out of, the fact that such person is or
was a director or officer of Primary Bank or any of its subsidiaries,
regardless of whether such Claim is asserted or claimed prior to, at or
after the Closing Date, to the fullest extent to which directors and
officers of Primary Bank are entitled under New Hampshire law, Primary
Bank's articles of agreement and bylaws, or other applicable law as in
effect on the date hereof (and Granite State shall pay expenses in advance
of the final disposition of any such action or proceeding to each
Indemnified Party to the extent permissible to a New Hampshire corporation
under New Hampshire law and Primary Bank's articles of agreement and bylaws
as in effect on the date hereof; provided, that the person to whom expenses
are advanced provides an undertaking to repay such expenses if it is
ultimately determined that such person is not entitled to indemnification).
All rights to indemnification in respect of a Claim asserted or made within
the period described in the preceding sentence shall continue until the
final disposition of such Claim.
(b) Any Indemnified Party wishing to claim indemnification under
Section 4.05(a), upon learning of any Claim, shall promptly notify Granite
State, but the failure to so notify shall not relieve Granite State of any
liability it may have to such Indemnified Party except to the extent that
such failure materially prejudices Granite State. In the event of any Claim,
(1) Granite State shall have the right to assume the defense thereof (with
counsel reasonably satisfactory to the Indemnified Party) and shall not be
liable to such Indemnified Parties for any legal expenses of other counsel
or any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that, if Granite State elects
not to assume
<PAGE> A--29
such defense or counsel for the Indemnified Parties advises that there are
issues which raise conflicts of interest between Granite State and the
Indemnified Parties, the Indemnified Parties may retain counsel satisfactory
to them, and Granite State shall pay all reasonable fees and expenses of
such counsel for the Indemnified Parties promptly as statements therefor are
received, (2) the Indemnified Parties will cooperate in the defense of any
such Claim and (3) Granite State shall not be liable for any settlement
effected without its prior written consent (which consent shall not
unreasonably be withheld).
(c) Granite State shall use its best efforts to cause the persons
serving as officers and directors of Primary Bank immediately prior to the
Effective Time to be covered for a period of three years from the Effective
Time by the directors' and officers' liability insurance policy maintained
by Primary Bank (provided that Granite State may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are not less advantageous than such policy) with respect to
acts or omissions occurring prior to the Effective Time which were committed
by such officers and directors in their capacity as such; provided, however,
that in no event shall Granite State be required to expend more than $30,000
annually (the "Insurance Amount") to maintain or procure insurance coverage
pursuant hereto; and provided, further, that if Granite State is unable to
maintain or obtain the insurance called for by this Section 4.05(c), Granite
State shall use all reasonable efforts to obtain as much comparable
insurance as is available for the Insurance Amount.
(d) In the event Granite State or any of is successors or assigns (1)
consolidates with or merges into any other Person and shall not continue or
survive such consolidation or merger, or (2) transfers or conveys all or
substantially all of its properties and assets to any Person, then, and in
each such case, to the extent necessary, proper provision shall be made so
that the successors and assigns of Granite State assume the obligations set
forth in this Section 4.05.
(e) The provisions of this Section 4.05 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
(f) Granite State agrees to honor and Granite State agrees to cause
Granite Bank to honor all terms and conditions of all existing employment
contracts and special termination agreements disclosed in the Primary Bank
Disclosure Schedules. Except as otherwise provided herein, and unless
otherwise agreed to in writing by the affected officer and employee, Granite
State agrees for itself and the Granite State Subsidiaries that the
consummation of the transactions contemplated hereby is a "Change in
Control" as defined in the employment and special termination agreements
entered into between Primary Bank and certain officers and employees as
disclosed on the Primary Bank Disclosure Schedule, and represents that the
consummation of the transactions contemplated hereby is not a "Change in
Control" as defined in the employment and special termination agreements
entered into between Granite State and certain officers and employees
thereof.
Section 4.06. No Other Bids and Related Matters. Primary Bank will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any Acquisition Proposal (as hereinafter defined), will enforce
any confidentiality agreements and will take the necessary steps to inform
the appropriate individuals or entities referred to in the first sentence of
this Section 4.06 of the obligations undertaken in this Section 4.06.
Primary Bank agrees that neither Primary Bank nor any of its Subsidiaries
shall, and that Primary Bank and its Subsidiaries shall direct and use all
reasonable efforts to cause their respective directors, officers, employees,
agents and representatives (including, without limitation, any investment
banker, attorney or accountant retained by it or any of its subsidiaries)
not to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making or implementation of any proposal or offer with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any substantial part of the assets or
any equity securities of,
<PAGE> A--30
Primary Bank or any of its Subsidiaries (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or engage in any
discussions or negotiations with, or provide any confidential information or
data to, any Person relating to an Acquisition Proposal; provided, that, if
Primary Bank is not otherwise in violation of this Section 4.06, the Board
of Directors of Primary Bank may furnish or cause to be furnished
information to any third party and may participate in such discussions and
negotiations directly or through its representatives if such Board of
Directors, after having consulted with and considered the written advice of
Goodwin, Procter & Hoar LLP, counsel to Primary Bank, has determined that
there is a reasonable basis to conclude that the failure to provide such
information or participate in such other negotiations and discussions would
constitute a breach of their fiduciary duties under New Hampshire law. If
any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, Primary Bank or any of its subsidiaries,
Primary Bank will immediately notify Granite State. Nothing contained in
this Section 4.06 shall be deemed to prohibit Primary Bank from (i) taking
or disclosing to shareholders any position necessary in order to comply with
the filing and disclosure requirements of Section 14(d)(9) of the Exchange
Act and the related rules and regulations of the SEC, and (ii) making any
disclosure to the shareholders of Primary Bank which the Board of Directors
of Primary Bank, after having consulted with and considered the written
advice of Goodwin, Procter & Hoar LLP, counsel to Primary Bank, has
reasonably determined is required in order to comply with Primary Bank's
fiduciary duties to its shareholders under applicable law.
Section 4.07. Duty to Advise; Duty to Update Primary Bank's Disclosure
Schedule. Primary Bank shall promptly advise Granite State of any change or
event having a Material Adverse Effect on it or on any Primary Bank
Subsidiary or which it believes would or would be reasonably likely to cause
or constitute a material breach of any of its representations, warranties or
covenants set forth herein. Primary Bank shall update Primary Bank's
Disclosure Schedule as promptly as practicable after the occurrence of an
event or fact which, if such event or fact had occurred prior to the date of
this Agreement, would have been disclosed in the Primary Bank Disclosure
Schedule. The delivery of such updated Schedule shall not relieve Primary
Bank from any breach or violation of this Agreement and shall not have any
effect for the purposes of determining the satisfaction of the condition set
forth in Sections 5.02(c) hereof.
Section 4.08. Conduct of Granite State's Business.
(a) From the date of this Agreement to the Closing Date, Granite State
will use its best efforts to (x) preserve its business organizations intact,
(y) maintain good relationships with employees, and (z) preserve for itself
the goodwill of customers of Granite Bank. From the date of this Agreement
to the Closing Date, neither Granite State nor Granite Bank will (i) amend
its articles of agreement or bylaws in any manner inconsistent with the
prompt and timely consummation of the transactions contemplated by this
Agreement, (ii) issue any equity securities except in connection with the
exercise of any employee or director stock options, (iii) take any action
which would result in any of the representations and warranties of Granite
State or Granite Bank set forth in this Agreement becoming untrue as of any
date after the date hereof or in any of the conditions set forth in Article
V hereof not being satisfied, except in each case as may be required by
applicable law, (iv) intentionally and knowingly take any action that would
preclude satisfaction of the condition to closing contained in Section
5.02(k) relating to financial accounting treatment of the Merger; or (v)
agree to do any of the foregoing.
(b) From the date of this Agreement through the Closing Date, Granite
State will not, nor will it permit Granite Bank to, enter into any agreement
to acquire or sell any material branch office (excluding the de novo
establishment of a branch office), or to acquire all or substantially all of
the capital stock of, merge with, or purchase substantially all the assets
and assume substantially all the liabilities of, any other company (an
"Acquisition"), unless the prior written consent of Primary Bank is
obtained.
<PAGE> A--31
Section 4.09. Board and Committee Minutes. Granite State and Primary
Bank shall each provide to the other, within thirty (30) days after any
meeting of their respective Board of Directors, or any committee thereof, or
any senior management committee, a copy of the minutes of such meeting,
except that with respect to any meeting held within thirty (30) days of the
Closing Date, such minutes shall be provided to each party prior to the
Closing Date.
Section 4.10. Undertakings by Granite State and Primary Bank.
(a) From and after the date of this Agreement:
(i) Voting by Directors. Granite State and Primary Bank shall
recommend to all members of their respective Board of Directors to
vote all shares of Primary Bank Common Stock, or Granite State Common
Stock, as the case may be, beneficially owned by each such director in
favor of this Agreement. As promptly as practicable following
execution of this Agreement, Granite State's Directors shall enter
into the agreement set forth as Exhibit 2 to this Agreement;
(ii) Proxy Solicitor. Granite State and Primary Bank shall each
retain a proxy solicitor in connection with the solicitation of
shareholder approval of this Agreement;
(iii) Timely Review. If requested by Granite State at Granite
State's sole expense, Primary Bank shall cause its independent
certified public accountants to perform a review of its unaudited
consolidated financial statements as of the end of any calendar
quarter, in accordance with Statement of Auditing Standards No. 36,
and to issue their report on such financial statements as soon as is
practicable thereafter;
(iv) Outside Service Bureau Contracts. If requested to do so by
Granite State, Primary Bank shall use its best efforts to obtain an
extension of any contract with an outside service bureau or other
vendor of services to Primary Bank, on terms and conditions mutually
acceptable to Primary Bank and Granite State;
(v) Committee Meetings. Primary Bank shall permit a
representative of Granite State, who is reasonably acceptable to
Primary Bank, to attend all committee meetings of Primary Bank and
Primary Bank management including, without limitation, any loan or
asset/liability committee. Primary Bank shall respond reasonably and
in good faith to any request of Granite State to permit a
representative of Granite State, who is reasonably acceptable to
Primary Bank, to attend any meeting of Primary Bank's Board of
Directors or the Executive Committee thereof;
(vi) List of Nonperforming Assets. Primary Bank and Granite
State shall provide the other, within ten (10) days of the end of each
calendar month, a written list of nonperforming assets (the term
"nonperforming assets," for purposes of this subsection, means (i)
loans that are "troubled debt restructuring" as defined in Statement
of Financial Accounting Standards No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructuring," (ii) loans on nonaccrual,
(iii) real estate owned, and (iv) all loans ninety (90) days or more
past due) as of the end of such month; and
(vii) Reserves and Merger-Related Costs. On or before the
Effective Date, Primary Bank shall establish such additional accruals
and reserves as may be necessary to conform the accounting reserve
practices and methods (including credit loss practices and methods) of
Primary Bank to those of Granite State (as such practices and methods
are to be applied to Primary Bank from and after the Closing Date) and
Granite State's plans with respect to the conduct of the business of
Primary Bank
<PAGE> A--32
following the Merger and otherwise to reflect Merger-related expenses
and costs incurred by Primary Bank, provided, however, that Primary
Bank shall not be required to take such action unless Granite State
agrees in writing that all conditions to closing set forth in Section
5.02 have been satisfied or waived (except for the expiration of any
applicable waiting periods); prior to the delivery by Granite State of
the writing referred to in the preceding clause, Primary Bank shall
provide Granite State a written statement, certified without personal
liability by the chief executive officer of Primary Bank and dated the
date of such writing, that the representation made in Section 2.15
hereof is true as of such date or, alternatively, setting forth in
detail the circumstances that prevent such representation from being
true as of such date; and no accrual or reserve made by Primary Bank
or any Primary Bank Subsidiary pursuant to this subsection, or any
litigation or regulatory proceeding arising out of any such accrual or
reserve, shall constitute or be deemed to be a breach or violation of
any representation, warranty, covenant, condition or other provision
of this Agreement or to constitute a termination event within the
meaning of Section 6.01(d) hereof.
(b) From and after the date of this Agreement, Granite State and
Primary Bank shall each:
(i) Shareholders Meetings. Submit this Agreement to its
shareholders for approval at a meeting to be held as soon as
practicable, and use their respective best efforts to cause their
Boards of Director to recommend approval of this Agreement to their
respective shareholders. The Board of Directors of Primary Bank may
fail to make such a recommendation, or withdraw, modify or change any
such recommendation only if such Board of Directors, after having
consulted with and considered the written advice of Goodwin, Procter &
Hoar LLP, counsel to Primary Bank, has determined that there is a
reasonable basis to conclude that the making of such recommendation,
or the failure so to withdraw, modify or change its recommendation,
would constitute a breach of the fiduciary duties of such directors
under New Hampshire law, and such failure, withdrawal, modification or
change will not constitute a breach of this Agreement;
(ii) Filings and Approvals. Cooperate with the other in the
preparation and filing, as soon as practicable, of (A) the
Applications, (B) any Registration Statement, Proxy Statement and
related filings under state securities laws covering the Granite State
Common Stock to be issued pursuant to the Merger, (C) all other
documents necessary to obtain any other approvals and consents
required to effect the completion of the Merger, and (D) all other
documents contemplated by this Agreement;
(iii) Identification of Primary Bank's Affiliates. Cooperate
with the other and use its best efforts to identify those persons who
may be deemed to be Affiliates of Primary Bank;
(iv) Public Announcements. Cooperate and cause its respective
officers, directors, employees and agents to cooperate in good faith,
consistent with their respective legal obligations, in the preparation
and distribution of, and agree upon the form and substance of, any
press release related to this Agreement and the transactions
contemplated hereby, and any other public disclosures related thereto,
including without limitation communications to Primary Bank
shareholders, Primary Bank's internal announcements and customer
disclosures, but nothing contained herein shall prohibit either party
from making any disclosure which its counsel deems necessary, provided
that the disclosing party notifies the other party reasonably in
advance of the timing and contents of such disclosure;
(v) Maintenance of Insurance. Maintain, and cause their
respective Subsidiaries to maintain, insurance in such amounts as are
reasonable to cover such risks as are customary in relation to the
character and location of its properties and the nature of its
business;
<PAGE> A--33
(vi) Maintenance of Books and Records. Maintain, and cause their
respective Subsidiaries to maintain, books of account and records in
accordance with generally accepted accounting principles applied on a
basis consistent with those principles used in preparing the financial
statements heretofore delivered;
(vii) Delivery of Securities Documents. Deliver to the other,
copies of all Securities Documents simultaneously with the filing
thereof;
(viii) Taxes. File all federal, state, and local tax returns
required to be filed by them or their respective Subsidiaries on or
before the date such returns are due (including any extensions) and
pay all taxes shown to be due on such returns on or before the date
such payment is due; or
Section 4.11. Employee and Termination Benefits; Directors and
Management.
(a) Employee Benefits. On and after the Effective Date, the employee
pension and welfare benefit plans of Granite State and Primary Bank may, at
Granite State's election and subject to the requirements of the IRC,
continue to be maintained separately or consolidated. In the event of a
consolidation of any or all of such plans or in the event of termination of
the Primary Bank benefit plans, Primary Bank and Primary Bank employees
shall receive credit for service with Primary Bank under any Granite State
benefit plan, or new Granite State benefit plan in which such employees
would be eligible to enroll for purposes of eligibility and vesting
determination (but not for benefit accrual purposes). Granite State and/or
Granite Bank shall make available to Primary Bank employees who become
employed by Granite State or a Granite subsidiary, employer-provided health
coverage on the same basis as it provides such coverage to Granite State or
Granite Bank employees. In the event of any termination of or consolidation
of any Primary Bank health plan with any Granite State health plan, all
employees of Primary Bank who become full-time employees of Granite State or
Granite Bank, who were eligible for continued coverage under the terminated
or consolidated plan shall have immediate coverage of any pre-existing
condition. In the event of a termination or consolidation of any Primary
Bank health plan, terminated Primary Bank employees and qualified
beneficiaries or retained Primary Bank employees who do not satisfy the
Granite State conditions for employer-provided coverage, will have the right
to continue coverage under group health plans of Granite State and/or
Granite State subsidiaries in accordance with IRC Section 4980B(f).
(b) Upon the Effective Date, Mr. Christopher J. Flynn, the President
and Chief Executive Officer of Primary Bank, shall become President of
Granite Bank and shall be offered a 3-year employment agreement with Granite
Bank on terms no less favorable than the contract between Primary Bank and
Mr. Flynn in effect as of the date of this Agreement, and which shall
provide that Mr. Flynn is not entitled to any payments under his employment
agreement in effect as of the date hereof as a result of this Agreement and
the Merger. Upon the Effective Date, Mr. Flynn shall be granted an incentive
stock option by Granite State to purchase 5,000 shares of Granite State
Common Stock at an exercise price equal to the Granite State Market Value,
which option shall be exercisable in equal installments over a five year
period and which shall vest immediately upon a change in control of Granite
State. In addition, Mr. Flynn will be entitled to participate in a
Supplemental Executive Retirement Plan that will provide him with benefits
to which he would have been entitled under any tax qualified employee
pension plan sponsored by Granite Bank but for the limitations imposed by
Sections 401(a)(17), 415(b)(1)(A) and 415(c)(1)(A) of the IRC. Upon the
Effective Date, Charles P. Monaghan, Senior Vice President of Primary Bank,
shall become a Senior Vice President of Granite Bank, and shall be offered
an employment agreement substantially equivalent to the contract between
Primary Bank and Mr. Monaghan in effect as of the date of this Agreement,
which employment agreement shall terminate two years from the Effective
Date, shall provide a severance payment upon termination equal to two year's
salary, and which shall provide that no payments thereunder (or under the
existing employment and special termination agreement
<PAGE> A--34
between Primary Bank and Mr. Monaghan) are due Mr. Monaghan as a result of
this Agreement and the Merger. Upon the Effective Date, Mr. Monaghan shall
also be provided a special termination agreement substantially in the form
currently provided to the executive officers of Granite State. If the
Effective Date occurs in calendar year 1997, Messrs. Flynn and Monaghan
shall be entitled to participate in the Granite Bank senior officer
incentive compensation bonus plan for 1997 on the same basis as other senior
officers of Granite Bank. Other employees of Primary Bank shall be entitled
to pro rata bonus payments under the Primary Bank bonus or incentive plan in
effect on the date hereof in amounts accrued by Primary Bank through the
Effective Date and consistent with past practice.
(c) Prior to or at the Effective Date, three directors of Primary Bank
to be designated by Primary Bank (one of whom shall be Mr. Flynn), after
consultation with and the consent of Granite State (which consent shall not
be unreasonably withheld), shall be elected to the Board of Directors of
Granite State effective upon the Effective Date, and shall be divided evenly
among the classes.
(d) Prior to or at the Effective Date, four directors of Primary Bank
to be designated by Primary Bank (one of whom shall be Mr. Flynn), after
consultation with and the consent of Granite State and Granite Bank (which
consent shall not be unreasonably withheld), shall be elected to the Board
of Directors of Granite Bank effective upon the Effective Date and shall be
divided as nearly equally among the classes as is practicable.
Section 4.12. Duty to Advise; Duty to Update Granite State's
Disclosure Schedule. Granite State shall promptly advise Primary Bank of any
change or event having a Material Adverse Effect on it or on any Granite
State Subsidiary or which it believes would or would be reasonably likely to
cause or constitute a material breach of any of its representations,
warranties or covenants set forth herein. Granite State shall update Granite
State's Disclosure Schedules as promptly as practicable after the occurrence
of an event or fact which, if such event or fact had occurred prior to the
date of this Agreement, would have been disclosed in the Granite State
Disclosure Schedule. The delivery of such updated Schedule shall not relieve
Granite State from any breach or violation of this Agreement and shall not
have any effect for the purposes of determining the satisfaction of the
condition set forth in Sections 5.01(c) hereof.
Section 4.13. Affiliate Letter. No later than five days after the date
of this Agreement, Primary Bank shall use its best efforts to cause to be
delivered to Granite State the Letter Agreement attached hereto as Exhibit
1, executed by each director and officer set forth thereon.
ARTICLE V
CONDITIONS
Section 5.01. Conditions to Primary Bank's Obligations under this
Agreement. The obligations of Primary Bank hereunder shall be subject to
satisfaction at or prior to the Closing Date of each of the following
conditions, unless waived by Primary Bank pursuant to Section 7.03 hereof:
(a) Corporate Proceedings. All action required to be taken by,
or on the part of, Granite State and Granite Bank to authorize the
execution, delivery and performance of this Agreement and the Plan of
Merger, respectively, and the consummation of the transactions
contemplated by this Agreement and the Plan of Merger, shall have been
duly and validly taken by Granite State and Granite Bank; and Primary
Bank shall have received certified copies of the resolutions
evidencing such authorizations;
(b) Covenants. The obligations and covenants of Granite State
required by this Agreement to be performed by Granite State at or
prior to the Closing Date shall have been duly performed and complied
with in all respects, except where the failure to perform or comply
with any obligation or
<PAGE> A--35
covenant would not, either individually or in the aggregate, result in
a Material Adverse Effect with respect to Granite State;
(c) Representations and Warranties. The representations and
warranties of Granite State set forth in this Agreement shall be true
and correct, as of the date of this Agreement, and as of the Closing
Date as though made on and as of the Closing Date, except as to any
representation or warranty (i) which specifically relates to an
earlier date or (ii) where the breach of the representation or
warranty would not, either individually or in the aggregate,
constitute a Material Adverse Effect with respect to Granite State and
Granite Bank;
(d) Approvals of Regulatory Authorities. Granite State shall
have received all required approvals of Regulatory Authorities of the
Merger (without the imposition of any conditions that are in Granite
State's reasonable judgement unduly burdensome) and delivered copies
thereof to Primary Bank; and all notice and waiting periods required
thereunder shall have expired or been terminated. For purposes of this
paragraph, a divestiture by Granite Bank of its Peterborough, New
Hampshire branch that is required as a condition to any regulatory
approval shall not be deemed unduly burdensome;
(e) No Injunction. There shall not be in effect any order,
decree or injunction of a court or agency of competent jurisdiction
which enjoins or prohibits consummation of the transactions
contemplated hereby;
(f) No Material Adverse Effect. Since December 31, 1996, there
shall not have occurred any Material Adverse Effect with respect to
Granite State;
(g) Officer's Certificate. Granite State shall have delivered to
Primary Bank a certificate, dated the Closing Date and signed, without
personal liability, by its chairman of the board or president, to the
effect that the conditions set forth in subsections (a) through (f) of
this Section 5.01 and Section 5.02(m) have been satisfied, to the best
knowledge of the officer executing the same;
(h) Opinion of Granite State's Counsel. Primary Bank shall have
received an opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.,
counsel to Granite State, dated the Closing Date, in form and
substance reasonably satisfactory to Primary Bank and its counsel to
the effect set forth on Exhibit 4 attached hereto;
(i) Registration Statement. Any Registration Statement that may
be filed with the SEC shall be effective under the Securities Act and
no proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; and all required
approvals by state securities or "blue sky" authorities with respect
to the transactions contemplated by this Agreement, shall have been
obtained;
(j) Tax Opinion. Primary Bank shall have received an opinion of
Luse Lehman Gorman Pomerenk & Schick, P.C. substantially to the effect
set forth on Exhibit 5 attached hereto;
(k) Approval of Primary Bank's Shareholders. This Agreement
shall have been approved by the shareholders of Primary Bank by such
vote as is required under applicable New Hampshire law, Primary Bank's
articles of agreement and bylaws, and under Nasdaq requirements
applicable to it; and
(l) Investment Banking Opinion. Primary Bank shall have received
the written opinion from Northeast Capital on or before the date of
this Agreement and updated in writing as of a date within
<PAGE> A--36
five (5) days of mailing the Prospectus/Proxy Statement, to the effect
that the consideration to be received by shareholders of Primary Bank
pursuant to this Agreement is fair, from a financial point of view, to
such shareholders.
(m) Stock Exchange Listing. The shares of Granite State Common
Stock which shall be issued to the shareholders of Primary Bank upon
consummation of the Merger shall have been authorized for listing on
the Nasdaq National Market System, subject to official notice of
issuance.
Section 5.02. Conditions to Granite State's Obligations under this
Agreement. The obligations of Granite State hereunder shall be subject to
satisfaction at or prior to the Closing Date of each of the following
conditions, unless waived by Granite State pursuant to Section 7.03 hereof:
(a) Corporate Proceedings. All action required to be taken by,
or on the part of, Primary Bank to authorize the execution, delivery
and performance of this Agreement and the Plan of Merger,
respectively, and the consummation of the transactions contemplated by
this Agreement and the Plan of Merger, shall have been duly and
validly taken by Primary Bank; and Granite State shall have received
certified copies of the resolutions evidencing such authorizations;
(b) Covenants. The obligations and covenants of Primary Bank,
required by this Agreement to be performed by it at or prior to the
Closing Date shall have been duly performed and complied with in all
respects, except where the failure to perform or comply with any
obligation or covenant would not, either individually or in the
aggregate, result in a Material Adverse Effect with respect to Primary
Bank;
(c) Representations and Warranties. The representations and
warranties of Primary Bank set forth in this Agreement shall be true
and correct as of the date of this Agreement, and as of the Closing
Date as though made on and as of the Closing Date, except as to any
representation or warranty (i) which specifically relates to an
earlier date or (ii) where the breach of the representation or
warranty would not, either individually or in the aggregate, result in
a Material Adverse Effect with respect to Primary Bank;
(d) Approvals of Regulatory Authorities. Granite State shall
have received all required approvals of Regulatory Authorities of the
Merger (without the imposition of any conditions that are in Granite
State's reasonable judgement unduly burdensome) and delivered copies
thereof to Primary Bank; and all notice and waiting periods required
thereunder shall have expired or been terminated. For purposes of this
paragraph, a divestiture by Granite Bank of its Peterborough branch
that is required as a condition to any regulatory approval shall not
be deemed unduly burdensome;
(e) No Injunction. There shall not be in effect any order,
decree or injunction of a court or agency of competent jurisdiction
which enjoins or prohibits consummation of the transactions
contemplated hereby;
(f) No Material Adverse Effect. Since December 31, 1996, there
shall not have occurred any Material Adverse Effect with respect to
Primary Bank.
(g) Officer's Certificate. Primary Bank shall have delivered to
Granite State a certificate, dated the Closing Date and signed,
without personal liability, by its chairman of the board or president,
to the effect that the conditions set forth in subsections (a) through
(f) of this Section 5.02 and Section 5.01(k) have been satisfied, to
the best knowledge of the officer executing the same;
<PAGE> A--37
(h) Opinions of Primary Bank's Counsel. Granite State shall have
received an opinion of Goodwin, Procter & Hoar LLP, counsel to Primary
Bank, dated the Closing Date, in form and substance reasonably
satisfactory to Granite State and its counsel to the effect set forth
on Exhibit 7 attached hereto;
(i) Registration Statement. Any Registration Statement filed
with the SEC shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend the
effectiveness of the Registration Statement; and all required
approvals by state securities or "blue sky" authorities with respect
to the transactions contemplated by this Agreement, shall have been
obtained;
(j) Tax Opinion. Granite State shall have received an opinion of
Luse Lehman Gorman Pomerenk & Schick, P.C., its counsel, substantially
to the effect set forth on Exhibit 5 attached hereto;
(k) Pooling Letter. Granite State shall have received (i) an
opinion from Grant Thornton LLP to the effect that the merger will be
treated as a "pooling of interest," as defined by GAAP, for financial
accounting purposes and (ii) a letter, in a form satisfactory to Grant
Thornton LLP, from Primary Bank representing to Granite State that
they have not entered into any transaction or are aware of any events
or circumstance that would preclude the Merger from being treated as a
"pooling of interest" for financial accounting purposes and (iii) a
letter, in a form satisfactory to Grant Thornton LLP, from Primary
Bank's independent auditor representing that they are not aware of any
transactions or of any events or circumstances that would preclude the
Merger from being treated as a "pooling of interest" for financial
accounting purposes;
(l) Liquidation Account. Neither the Merger or consummation of
the Plan of Merger shall require Granite State or Primary Bank to
distribute to depositors the liquidation account established by
Primary Bank in connection with its conversion from mutual to stock
form;
(m) Approval of Granite State's Shareholders. This Agreement
shall have been approved by the shareholders of Granite State by such
vote as is required under Granite State's articles of incorporation
and bylaws or under Nasdaq requirements applicable to it; and
(n) Investment Banking Opinion. Granite State shall have
received the written opinion from FBR on or before the date of this
Agreement and updated in writing as of a date within five (5) days of
mailing the Prospectus/Proxy Statement to the effect that the Merger
is fair to Granite State.
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination. This Agreement may be terminated on or at
any time prior to the Closing Date:
(a) By the mutual written consent of the parties hereto;
(b) By Granite State or Primary Bank:
(i) if there shall have been any breach of any
representation, warranty, covenant or other obligation of
Granite State which results in a Material Adverse Effect with
respect to Granite State, on the one hand, or of Primary Bank
which results in a Material Adverse Effect
<PAGE> A--38
with respect to Primary Bank, on the other hand, and such breach
cannot be, or shall not have been, remedied within 30 days after
receipt by such other party of notice in writing specifying the
nature of such breach and requesting that it be remedied;
(ii) if the Closing Date shall not have occurred on or
before February 28, 1998, unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe its agreements set forth in
this Agreement required to be performed or observed by such
party on or before the Closing Date; or
(iii) if either party has been informed in writing by a
Regulatory Authority whose approval or consent has been
requested that such approval or consent is unlikely to be
granted (except any approval or consent conditioned upon
divestiture of the Peterborough branches of Granite Bank),
unless the failure of such occurrence shall be due to the
failure of the party seeking to terminate this Agreement to
perform or observe its agreements set forth herein required to
be performed or observed by such party on or before the Closing
Date; or
(iv) by either Granite State or Primary Bank if any
approval of the shareholders of Granite State or Primary Bank
required for the consummation of the Merger shall not have been
obtained by reason of the failure to obtain the required vote at
a duly held meeting of shareholders or at any adjournment or
postponement thereof.
(c) By Primary Bank (i) if on the Closing Date the Granite State
Market Value on the Determination Date shall be less than $20.300 (or
$13.533 after giving effect to the Granite State three-for-two stock
split payable in the form of a dividend on May 9, 1997); (ii) if and
after it enters into an agreement relating to a Superior Acquisition
Proposal (for purposes of this Agreement, a "Superior Acquisition
Proposal" means any bona fide Acquisition Proposal, the terms of which
the Primary Bank Board of Directors determines in good faith after
receiving the advice of Primary Bank's counsel and financial advisor
to be more favorable to Primary Bank's stockholders than the Merger),
provided that Primary Bank is in compliance with Section 4.06; or
(iii) following a vote by the Primary Bank Board of Directors to
withdraw, modify or change its recommendation of approval of the
Merger to the Primary Bank stockholders as provided by Section
4.10(b)(i).
Section 6.02. Effect of Termination.
(a) If this Agreement is terminated pursuant to Section 6.01 hereof,
this Agreement shall forthwith become void (other than Section 4.02(d),
Section 4.10(b)(iii) and Section 7.01 hereof, which shall remain in full
force and effect), and there shall be no further liability on the part of
Granite State or Primary Bank to the other, except for any liability arising
out of any uncured willful breach of any covenant or other agreement
contained in this Agreement or any fraudulent breach of a representation or
warranty.
(b) Any termination of this Agreement by Primary Bank pursuant to
Section 6.01(b)(i) (ii) or (iii) hereof based on a breach of a
representation or warranty, or the breach of a covenant, by Granite State
that is caused by the willful misconduct or gross negligence of Granite
State, Granite State shall pay Primary Bank for all out-of-pocket costs and
expenses, including, without limitation, reasonable legal, accounting and
investment banking fees and expenses, incurred by Primary Bank in connection
with the entering into this Agreement and the carrying out of any and all
acts contemplated hereunder up to a maximum of $584,000.
<PAGE> A--39
ARTICLE VII
MISCELLANEOUS
Section 7.01. Expenses. Except for the cost of printing and mailing
the Proxy Statement/Prospectus which shall be shared equally, each party
hereto shall bear and pay all costs and expenses incurred by it in
connection with the transactions contemplated hereby, including fees and
expenses of its own financial consultants, accountants and counsel.
Section 7.02. Non-Survival of Representations and Warranties. All
representations, warranties and, except to the extent specifically provided
otherwise herein, agreements and covenants, other than those covenants set
forth in Sections 4.05, and 4.11(a), (c), (d) and (e) which will survive the
Merger, shall terminate on the Closing Date.
Section 7.03. Amendment, Extension and Waiver. Subject to applicable
law, at any time prior to the consummation of the transactions contemplated
by this Agreement, the parties may (a) amend this Agreement, (b) extend the
time for the performance of any of the obligations or other acts of either
party hereto, (c) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto, or
(d) waive compliance with any of the agreements or conditions contained in
Articles IV and V hereof or otherwise. This Agreement may not be amended
except by an instrument in writing authorized by the respective Boards of
Directors and signed, by duly authorized officers, on behalf of the parties
hereto. Any agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in writing signed
by a duly authorized officer on behalf of such party, but such waiver or
failure to insist on strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
Section 7.04. Entire Agreement. This Agreement, including the
documents and other writings referred to herein or delivered pursuant
hereto, contains the entire agreement and understanding of the parties with
respect to its subject matter. This Agreement supersedes all prior
arrangements and understandings between the parties, both written or oral
with respect to its subject matter. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors; provided, however, that nothing in this Agreement, expressed or
implied, is intended to confer upon any party, other than the parties hereto
and their respective successors, any rights, remedies, obligations or
liabilities other than pursuant to Sections 1.02(d)(i) and (iii), 1.02(g),
4.05, and 4.11(a) and (c) with respect to indemnification, employee benefits
and certain other matters, and provided, further, that any such rights,
remedies, obligations or liabilities conferred pursuant to Sections 4.11(a)
and (c) shall terminate and expire one (1) year from the Effective Date.
Section 7.05. No Assignment. Neither party hereto may assign any of
its rights or obligations hereunder to any other person, without the prior
written consent of the other party hereto.
Section 7.06. Notices. All notices or other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
mailed by prepaid registered or certified mail (return receipt requested),
or sent by telecopy, addressed as follows:
(a) If to Granite State, to:
Granite State Bankshares, Inc.
122 West Street
Keene, New Hampshire 03431-0627
<PAGE> A--40
Attention: Charles W. Smith, President and Chief
Executive Officer
Telecopy No.: (603) 358-5707
with a copy to:
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Attention: John J. Gorman, Esquire
Telecopy No.: (202) 362-2902
(b) If to Primary Bank, to:
Primary Bank
35 Main Street
Peterborough, New Hampshire 03458
Attention: Christopher J. Flynn
President and Chief Executive Officer
Telecopy No.: (603) 924-3706
with copies to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109-2881
Attention: William P. Mayer, Esquire
Telecopy No.: (617) 523-1231
Section 7.07. Captions. The captions contained in this Agreement are
for reference purposes only and are not part of this Agreement.
Section 7.08. Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement.
Section 7.09. Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the
application of such provisions to other persons or circumstances shall not
be affected thereby and shall be enforced to the greatest extent permitted
by law.
Section 7.10. Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic internal law (including the law of
conflicts of law) of the State of New Hampshire.
<PAGE> A--41
IN WITNESS WHEREOF, the parties have caused this Agreement, as
amended, to be executed by their duly authorized officers as of the day and
year first above written.
GRANITE STATE BANKSHARES, INC.
By: /s/ Charles W. Smith
Charles W. Smith
President and Chief Executive Officer
GRANITE BANK
By: /s/ Charles W. Smith
Charles W. Smith
President and Chief Executive Officer
PRIMARY BANK
By: /s/ Christopher J. Flynn
Christopher J. Flynn,
President and Chief Executive Officer
<PAGE> A--42
ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Plan of Merger"), dated as of
April 29, 1997, is by and between Primary Bank, a New Hampshire guaranty
(stock) savings bank ("Primary Bank"), and GRANITE BANK ("Granite Bank"), a
New Hampshire bank, and is joined in by GRANITE STATE BANKSHARES, INC.
("Granite State"), a New Hampshire corporation and a registered bank holding
company under the Bank Holding Act of 1956, as amended, and parent
corporation of Granite Bank.
WITNESSETH
WHEREAS, the respective Boards of Directors of Primary Bank, Granite
Bank and Granite State deem the merger of Primary Bank with and into Granite
Bank, under and pursuant to the terms and conditions herein set forth or
referred to, desirable and in the best interests of the respective
corporations and their respective shareholders, and the respective Boards of
Directors of Primary Bank, Granite Bank and Granite State have adopted
resolutions approving this Plan of Merger and a related Agreement and Plan
of Reorganization dated as of even date herewith (the "Reorganization
Agreement").
WHEREAS, Granite State, the sole shareholder of Granite Bank, has
consented to and joined in this Plan of Merger and has entered into the
Reorganization Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto do hereby agree as follows:
ARTICLE 1.
MERGER
Subject to the terms and conditions of this Plan of Merger, on the
Effective Date (as hereinafter defined), Primary Bank shall be merged with
and into Granite Bank, pursuant to the provisions of, and with the effect
provided in, Title 35 of the New Hampshire Revised Statutes Annotated (the
"Bank Merger"). On the Effective Date, the separate existence of Primary
Bank shall cease and Granite Bank, as the surviving entity, shall continue
unaffected and unimpaired by the Bank Merger (Granite Bank, as existing on
and after the Effective Date, being hereinafter sometimes referred to as the
"Surviving Bank").
ARTICLE 2.
ARTICLES OF AGREEMENT AND BY-LAWS
The Amended and Restated Articles of Agreement and the By-laws of
Granite Bank in effect immediately prior to the Effective Date shall be the
Articles of Agreement and the By-laws of the Surviving Bank, amended as set
forth below, in each case until amended in accordance with applicable law.
The Articles of Agreement of the Surviving Bank shall be amended effective
upon the Effective Date to add the following paragraph to the end of
existing Article VI:
"The Bank shall assume the Liquidation Account (the "Liquidation
Account") initially established and maintained by Primary Bank for the
benefit of Primary Bank's Eligible Account Holders as of July 28, 1993
("eligible savers"). Notwithstanding any provision of these Articles
or of the By-laws of the Bank to the contrary, in the event of a
complete liquidation of the Bank, it shall comply with the Plan of
Conversion with respect to the amount
<PAGE> A--43
and the priorities on liquidation of each of the Bank's eligible
savers' inchoate interest in the Liquidation Account, to the extent it
is still in existence; provided, that an eligible saver's inchoate
interest in the Liquidation Account shall not entitle such eligible
saver to any voting rights at meetings of the Bank's shareholders."
ARTICLE 3.
DIRECTORS AND OFFICERS
The directors of Granite Bank immediately prior to the Effective Date,
together with four directors of Primary Bank to be designated by Primary
Bank in accordance with Section 4.11(e) of the Reorganization Agreement,
will be the directors of the Surviving Bank on the Effective Date. The
officers of Granite Bank immediately prior to the Effective Date shall be
the officers of the Surviving Bank on the Effective Date, except then Mr.
Christopher J. Flynn, if he is the President and Chief Executive Officer of
Primary Bank immediately prior to the Effective Date, shall become the
President of the Surviving Bank on the Effective Date, and Charles P.
Monaghan, if he is a Senior Vice President of Primary Bank immediately prior
to the Effective Date, shall become a Senior Vice President of the Surviving
Bank on the Effective Date.
ARTICLE 4.
CONVERSION AND EXCHANGE OF PRIMARY BANKS SHARES;
FRACTIONAL SHARE INTERESTS
4.1. On the Effective Date (as hereinafter defined), each share of
common stock of Primary Bank, par value $0.01 per share ("Primary Bank
Common Stock"), outstanding immediately prior to the Effective Date (except
as provided in Articles 5, 6 and 8 of this Agreement), shall be converted
without any action on the part of the holder thereof into an amount of
common stock, par value $1.00 per share, of Granite State ("Granite State
Common Stock") equal to one share multiplied by the Exchange Ratio as
determined below (rounded to the nearest four decimal places).
4.2. As used herein, the term "Granite State Market Value" shall mean
the average of the inside closing bid price of Granite State Common Stock on
the Nasdaq National Market System (as reported by The Wall Street Journal)
for each of the twenty (20) consecutive trading days ending on the fifth
business day before the Effective Date.
4.3. (a) For purposes of this Plan of Merger, the Exchange Ratio shall
be:
(i) if the Granite State Market Value determined as of the
Effective Date is greater than or equal to $20.300 and less than or
equal to $25.375, then that number of shares of fully paid and
nonassessable shares of Granite State Common Stock, equal to $25.25
divided by the Granite State Market Value determined as of the
Effective Date;
(ii) if the Granite State Market Value determined as of the
Effective Date is greater than $25.375 and less than or equal to
$27.278, then .9951 shares of Granite State Common Stock;
(iii) if the Granite State Market Value determined as of the
Effective Date is greater than $27.278, then that number of shares of
fully paid and nonassessable shares of Granite State Common Stock,
equal to $27.144 divided by the Granite State Market Value determined
as of the Effective Date; or
<PAGE> A--44
(iv) if the Granite State Market Price determined as of the
Effective Date is less than $20.300, then 1.2438 shares of fully paid
and nonassessable shares of Granite State Common Stock, subject to the
termination provisions of Section 6.01(c)(i) of the Reorganization
Agreement.
(b) Notwithstanding the provisions of the preceding subparagraph (a),
in the event that before the Effective Date an announcement is made with
respect to a business combination involving the merger or acquisition of
Granite State or a substantial portion of its assets (a "GS Acquisition"),
the Exchange Ratio shall be that set forth in (a)(ii) above (as adjusted
pursuant to Section 4.7 herein). In addition, any GS Acquisition shall not
be consummated prior to the Merger and the transactions contemplated by this
Agreement.
4.4. On the Effective Date, all shares of Primary Bank Common Stock
held in the treasury of Primary Bank or owned beneficially by any subsidiary
of Primary Bank other than in a fiduciary capacity or in connection with a
debt previously contracted and all shares of Primary Bank Common Stock owned
by Granite State or owned beneficially by any subsidiary of Granite State
other than in a fiduciary capacity or in connection with a debt previously
contracted shall be canceled and no cash, stock or other property shall be
delivered in exchange therefor.
4.5. (a) Prior to the Effective Date, Granite State shall appoint a
bank, trust company or other stock transfer agent selected by Granite State
and agreed to by Primary Bank as the exchange agent (the "Exchange Agent")
to effect the exchange of certificates evidencing shares of Primary Bank
Common Stock (any such certificate being hereinafter referred to as a
"Certificate") for shares of Granite State Common Stock to be received in
the share exchange. On the Effective Date, Granite State shall have granted
the Exchange Agent the requisite power and authority to effect for and on
behalf of Granite State the issuance of the number of shares of Granite
State Common Stock issuable in the share exchange.
(b) Within five business days after the Effective Date, the Exchange
Agent shall mail to each holder of record of Primary Bank Common Stock as of
the Effective Date a notice of consummation of the share exchange and a form
of transmittal letter pursuant to which each such shareholder shall transmit
the Certificate or Certificates, or, in lieu thereof, such evidence of lost,
stolen or mutilated Certificate or Certificates and such surety bond as the
Exchange Agent may reasonably require in accordance with customary exchange
practices. Primary Bank shareholders who satisfy such requirements for lost,
stolen or mutilated certificates shall for purposes of the exchange
procedures set forth herein be deemed to have submitted Certificates for
Primary Bank Common Stock. As soon as practicable after surrender of such
Certificate to the Exchange Agent with a properly completed transmittal
letter, the Exchange Agent will promptly mail by first class mail to such
shareholder a certificate or certificates representing the number of full
shares of Granite State Common Stock into which the shares of Primary Bank
Common Stock evidenced by the Certificate surrendered shall have been
converted pursuant to this Plan of Merger.
(c) The Exchange Agent shall accept such Certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose
to effect an orderly exchange thereof in accordance with customary exchange
practices. Until so surrendered, each Certificate shall be deemed for all
purposes to evidence ownership of the number of shares of Granite State
Common Stock into which the shares represented by such Certificates have
been changed or converted as aforesaid. No dividends or other distributions
declared after the Effective Date with respect to Granite State Common Stock
shall be paid to the holder of any unsurrendered Certificate until the
holder thereof shall surrender such Certificate in accordance with this
Article 4. After the surrender of a Certificate in accordance with this
Article 4, the record holder thereof shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of Granite State
Common Stock represented by such Certificate.
<PAGE> A--45
(d) No transfer taxes shall be payable by any shareholders of Primary
Bank in respect of the issuance of certificates for Granite State Common
Stock and no expenses shall be imposed on any shareholder of Primary Bank in
connection with the conversion of shares of Primary Bank Common Stock into
shares of Granite State Common Stock and the delivery of such shares to the
former holder of Primary Bank Common Stock entitled thereto, except that, if
any Certificate for shares of Granite State Common Stock is to be issued in
a name other than that in which a Certificate or Certificates for shares of
Primary Bank Common Stock surrendered shall have been registered, it shall
be a condition to such issuance that the person requesting such issuance
shall pay to Granite State any transfer taxes payable by reason thereof or
of any prior transfer of such surrendered Certificate or Certificates or
establish to the reasonable satisfaction of the Exchange Agent that such
taxes have been paid or are not payable.
(e) Certificates surrendered for exchange by any person who is an
"affiliate" of Primary Bank for purposes of Rule 145(c) under the Securities
Act of 1933, as amended, shall not be exchanged for Certificates
representing shares of Granite State Common Stock until Granite State has
received the written agreement of such person contemplated by Section 4.9 of
the Reorganization Agreement. If any Certificate for shares of Primary Bank
Common Stock is to be issued in a name other than that in which a
certificate surrendered for exchange is issued, the Certificate so
surrendered shall be properly endorsed and otherwise in proper form for
transfer and the person requesting such exchange shall affix any requisite
stock transfer tax stamps to the Certificate surrendered or provide funds
for their purchase or establish to the reasonable satisfaction of Granite
State or its agent that such taxes are not payable.
4.6. Upon the Effective Date, the stock transfer books of Primary Bank
shall be closed and no transfer of Primary Bank Common Stock shall
thereafter be made or recognized. Any other provision of this Plan of Merger
notwithstanding, neither Granite State or its agent nor any party to the
share exchange shall be liable to a holder of Primary Bank Common Stock for
any amount paid or property delivered in good faith to a public official
pursuant to any applicable abandoned property, escheat or similar law.
4.7. In the event that, between the date hereof and prior to the
Effective Date, the outstanding shares of Granite State Common Stock or
Primary Bank Common Stock shall have been increased, decreased or changed
into or exchanged for a different number or kind of shares or securities by
reorganization, recapitalization, reclassification, stock split or other
like changes in the capitalization of Granite State or Primary Bank, or if a
stock dividend is declared on Granite State Common Stock or Primary Bank
Common Stock with a record date (as to a stock split, the pay date) within
such period, then an appropriate and proportionate adjustment shall be made
in the number and kind of shares of Granite State Common Stock to be
thereafter delivered pursuant to this Plan of Merger, and the dollar amounts
and the Exchange Ratio set forth in Section 4.3 of this Article 4, so that
each shareholder of Primary Bank shall be entitled to receive such number of
shares of Granite State Common Stock or other securities as such shareholder
would have received pursuant to such reorganization, recapitalization,
reclassification, stock split, exchange of shares or readjustment or other
like changes in the capitalization of Granite State or Primary Bank, or as a
result of a stock dividend on Granite State Common Stock or Primary Bank
Common Stock, had the record (or pay) date therefor been immediately
following the Effective Date. In accordance with the foregoing, and as
result of the three for two stock split (to be effected in the form of a
stock dividend) (the "Stock Split") declared by Granite State which is to be
paid on May 9, 1997 to stockholders of record on April 25, 1997, the
Exchange Ratio, after giving effect to the Stock Split, shall be determined
as follows:
(i) if the Granite State Market Value determined as of the
Effective Date is greater than or equal to $13.533 and less than or
equal to $16.917, then that number of shares of fully paid and
nonassessable shares of Granite State Common Stock, equal to $25.25
divided by the Granite State Market Value determined as of the
Effective Date;
<PAGE> A--46
(ii) if the Granite State Market Value determined as of the
Effective Date is greater than $16.917 and less than or equal to
$18.185, then 1.4926 shares of Granite State Common Stock;
(iii) if the Granite State Market Value determined as of the
Effective Date is greater than $18.185, then that number of shares of
fully paid and nonassessable shares of Granite State Common Stock,
equal to $27.144 divided by the Granite State Market Value determined
as of the Effective Date; or
(iv) if the Granite State Market Price determined as of the
Effective Date is less than $13.533, then 1.8658 shares of fully paid
and nonassessable shares of Granite State Common Stock, subject to the
termination provisions of Section 6.01(c)(i) of the Reorganization
Agreement.
4.8. Notwithstanding any other provision hereof, each holder of
shares, or of options to purchase shares, of Primary Bank Common Stock who
would otherwise have been entitled to receive a fraction of a share of
Granite State Common Stock (after taking into account all Certificates
delivered by such holder or all shares such holder is entitled to receive in
accordance with Article 4 hereof) shall receive (by check from the Exchange
Agent, mailed to the shareholder with the certificate(s) for Granite State
Common Stock which such holder is to receive pursuant to the share
exchange), in lieu thereof, cash in an amount equal to such fractional part
of a share of Granite State Common Stock multiplied by the "market value" of
such Common Stock. The "market value" of one share of Granite State Common
Stock shall be the closing price of Granite State Common Stock on the Nasdaq
National Market System (as reported by The Wall Street Journal) on the last
business day preceding the Effective Date. No such holder shall be entitled
to dividends, voting rights or any other shareholder right in respect of any
fractional share.
ARTICLE 5.
DISSENTERS' RIGHTS
Notwithstanding anything in this Plan of Merger to the contrary and
unless otherwise provided by applicable New Hampshire law, shares of Primary
Bank Common Stock that are issued and outstanding immediately prior to the
Effective Date and that are owned by stockholders who, pursuant to
applicable New Hampshire law, (1) deliver to Primary Bank before the taking
of the vote of Primary Bank's stockholders on the Plan of Merger a written
notice of their intent to demand payment for their shares of Primary Bank
Common Stock if the share exchange is effectuated, and (2) do not vote their
shares in favor of this Plan of Merger (the "Dissenting Shares"), shall not
be converted into the right to receive, or be exchangeable for, shares of
Granite State Common Stock, but, instead, the holders of such Dissenting
Shares shall be entitled to payment of the fair value of such Dissenting
Shares, plus accrued interest, in accordance with applicable New Hampshire
law. If any holders of Primary Bank Common Stock shall have failed to
perfect or shall have effectively withdrawn, waived or lost the right to
dissent from the share exchange and to receive the fair value of such shares
as provided under applicable New Hampshire law, the shares of Primary Bank
Common Stock held by such holder shall be deemed to have been converted into
and be exchangeable for shares of Granite State Common Stock on the
Effective Date.
ARTICLE 6.
STOCK OPTIONS
On the Effective Date, each then outstanding stock option to purchase
Primary Bank Common Stock ("Primary Bank Stock Options") pursuant to the
employee and director stock option plans identified in Primary Bank
Disclosure Schedules to the Reorganization Agreement (collectively, the
"Primary Bank Stock Option Plans") (it being understood that the aggregate
number of shares of Primary Bank Common Stock subject to
<PAGE> A--47
purchase pursuant to the exercise of such Primary Bank Stock Options is not
and shall not be more than 355,523) will be assumed by Granite State. Each
Primary Bank Stock Option so assumed by Granite State under this Agreement
shall continue to have, and be subject to, the same terms and conditions set
forth in the Primary Bank Stock Option Plans immediately prior to the
Effective Date, except that (i) such Primary Bank Stock Options shall be
exercisable for that number of whole shares of Granite State Common Stock
equal to the product of the number of shares of Primary Bank Common Stock
covered by the Primary Bank Stock Option multiplied by the Exchange Ratio,
provided that any fractional share of Granite State Common Stock resulting
from such multiplication shall be rounded up to the nearest share; and (ii)
the exercise price per share of Granite State Common Stock shall be equal to
the exercise price per share of Primary Bank Common Stock of such Primary
Bank Stock Option, divided by the Exchange Ratio, provided that such
exercise price shall be rounded down to the nearest cent. It is the
intention of the parties that the Primary Bank Options assumed by Granite
State qualify following the Effective Date as incentive stock options as
defined in Section 422 of the Internal Revenue Code of 1986, as amended to
the extent that the Primary Bank Options qualified as incentive stock
options immediately prior to the Effective Date. Promptly following the
Effective Date, Granite State shall reserve for issuance such number of
shares of Granite State Common Stock as shall be necessary to be issued
pursuant to the exercise of the options assumed by Granite State pursuant to
this Article 6, and Granite State shall file a registration statement on
Form S-8 to register the shares of Granite State Common Stock issuable in
connection therewith.
ARTICLE 7.
CAPITAL
The shares of capital stock of Granite Bank issued and outstanding
immediately prior to the Effective Date shall be the shares of the Surviving
Bank issued and outstanding on the Effective Date.
ARTICLE 8.
CANCELLATION OF PRIMARY BANK STOCK
Each share of Primary Bank capital stock issued and outstanding
immediately prior to the Effective Date shall, by virtue of the Bank Merger,
be canceled on the Effective Date, and no cash, stock or other property
shall be delivered in exchange therefor.
ARTICLE 9.
EFFECTIVE DATE OF THE MERGER
Certificates or articles of merger evidencing the transactions
contemplated herein shall be delivered to the New Hampshire Secretary of
State in accordance with applicable New Hampshire law. The Bank Merger shall
be effective at the time and on the date specified in such certificates or
articles of merger (such date and time being herein referred to as the
"Effective Date").
ARTICLE 10.
CONDITIONS PRECEDENT
The obligations of Primary Bank and Granite Bank to effect the Bank
Merger as herein provided shall be subject to satisfaction, unless duly
waived, of the conditions set forth in the Reorganization Agreement.
<PAGE> A--48
ARTICLE 11.
TERMINATION
Anything contained in this Plan of Merger to the contrary
notwithstanding, this Plan of Merger shall be terminated and the Bank Merger
abandoned as provided in the Reorganization Agreement.
ARTICLE 12.
MISCELLANEOUS
12.1. This Plan of Merger may be amended or supplemented at any time
prior to the Effective Date by mutual agreement of the parties hereto. Any
such amendment or supplement must be in writing and approved by the parties'
respective Boards of Directors and/or by officers authorized thereby.
12.2. Any notice or other communication required or permitted under
this Plan of Merger shall be given, and shall be effective, in accordance
with the provisions of the Reorganization Agreement.
12.3. The headings of the several Articles herein are inserted for
convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Plan of Merger.
12.4. This Plan of Merger shall be governed by and construed in
accordance with the laws of New Hampshire applicable to the internal affairs
of Primary Bank and Granite Bank.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement and Plan of Merger, as amended, to be
executed in counterparts by their duly authorized officers and their
corporate seals to be hereunto affixed and attested by their officers
thereunto duly authorized, all as of the day and year first above written.
PRIMARY BANK
By: /s/ Christopher J. Flynn
Christopher J. Flynn
President and Chief Executive Officer
GRANITE BANK
By: /s/ Charles W. Smith
Charles W. Smith
President and Chief Executive Officer
JOINED IN BY:
GRANITE STATE BANKSHARES, INC.
By: /s/ Charles W. Smith
Charles W. Smith
President and Chief Executive Officer
<PAGE> A--49
EXHIBIT 1
April 29, 1997
Granite State Bankshares, Inc.
122 West Street
Keene, New Hampshire 03431-0627
Ladies and Gentlemen:
Granite State Bankshares, Inc. ("Granite State") and Primary Bank
("Primary Bank") desire to enter into an agreement dated April 29, 1997
("Agreement"), pursuant to which, subject to the terms and conditions set
forth therein, (a) Primary Bank will merge with and into Granite Bank with
Granite Bank surviving the merger, and (b) shareholders of Primary Bank will
receive common stock of Granite State in exchange for common stock of
Primary Bank outstanding on the closing date (the foregoing, collectively,
referred to herein as the "Merger").
Granite State has required, as a condition to its execution and
delivery to Primary Bank of the Agreement, that the undersigned, being
directors, executive officers and major shareholders of Primary Bank,
execute and deliver to Granite State this Letter Agreement.
Each of the undersigned, in order to induce Granite State to execute
and deliver to Primary Bank the Agreement, hereby irrevocably:
(a) Agrees to be present (in person or by proxy) at all meetings
of shareholders of Primary Bank called to vote for approval of the
Merger so that all shares of common stock of Primary Bank then owned
by the undersigned will be counted for the purpose of determining the
presence of a quorum at such meetings and to vote all such shares (i)
in favor of approval and adoption of the Agreement and the
transactions contemplated thereby (including any amendments or
modifications of the terms thereof approved by the Board of Directors
of Primary Bank), and (ii) against approval or adoption of any other
merger, business combination, recapitalization, partial liquidation or
similar transaction involving Primary Bank;
(b) Agrees not to vote or execute any written consent to rescind
or amend in any manner any prior vote or written consent, as a
shareholder of Primary Bank, to approve or adopt the Agreement;
(c) Agrees to use reasonable best efforts to cause the Merger to
be consummated;
(d) Agrees not to sell, transfer or otherwise dispose of any
common stock of Primary Bank on or prior to the record date for the
meeting of Primary Bank shareholders to vote on the Merger;
(e) Except as permitted by Section 4.06 of the Agreement, agrees
not to solicit, initiate or engage in any negotiations or discussions
with any party other than Granite State with respect to any offer,
sale, transfer or other disposition of, any shares of common stock of
Primary Bank now or hereafter owned by the undersigned;
(f) Agrees not to offer, sell, transfer or otherwise dispose of
any shares of common stock of Granite State received in the Merger,
except (i) at such time as a registration statement under the
Securities Act of 1933, as amended ("Securities Act") covering sales
of such Granite State common
<PAGE> A--50
stock is effective and a prospectus is made available under the
Securities Act, (ii) within the limits, and in accordance with the
applicable provisions of, Rule 145(d) under the Securities Act, or
(iii) in a transaction which, in the opinion of counsel satisfactory
to Granite State or as described in a "no-action" or interpretive
letter from the staff of the Securities and Exchange Commission
("SEC"), is not required to be registered under the Securities Act;
and acknowledges and agrees that Granite State is under no obligation
to register the sale, transfer or other disposition of Granite State
common stock by the undersigned or on behalf of the undersigned, or to
take any other action necessary to make an exemption from registration
available;
(g) Notwithstanding the foregoing, agrees not to sell, or in any
other way reduce the risk of the undersigned relative to, any shares
of common stock of Primary Bank or of common stock of Granite State,
during the period commencing thirty days prior to the effective date
of the Merger and ending on the date on which financial results
covering at least thirty days of post-Merger combined operations of
Granite State and Primary Bank have been published within the meaning
of Section 201.01 of the SEC's Codification of Financial Reporting
Policies;
(h) Agrees that Granite State shall not be bound by any
attempted sale of any shares of Granite State common stock, and
Granite State's transfer agent shall be given an appropriate stop
transfer order and shall not be required to register any such
attempted sale, unless the sale has been effected in compliance with
the terms of this Letter Agreement; and further agrees that the
certificate representing shares of Granite State common stock owned by
the undersigned may be endorsed with a restrictive legend consistent
with the terms of this Letter Agreement;
(i) Acknowledges and agrees that the provisions of subparagraphs
(f), (g) and (h) hereof also apply to shares of Granite State common
stock received in the Merger (or any shares of Primary Bank common
stock or of Granite State common stock, whether or not received in the
Merger, for the period referred to in subparagraph (g) above) owned by
(i) his or her spouse, (ii) any of his or her relatives or relatives
of his or her spouse occupying his or her home, (iii) any trust or
estate in which he or she, his or her spouse, or any such relative
owns at least a 10% beneficial interest or of which any of them serves
as trustee, executor or in any similar capacity, and (iv) any
corporation or other organization in which the undersigned, any
affiliate of the undersigned, his or her spouse, or any such relative
owns at least 10% of any class of equity securities or of the equity
interest;
(j) Represents that the undersigned has no plan or intention to
sell, exchange, or otherwise dispose of any shares of common stock of
Granite State to be received in the Merger prior to expiration of the
time period referred to in subparagraph (g) hereof; and
(k) Represents that the undersigned has the capacity to enter
into this Letter Agreement and that it is a valid and binding
obligation enforceable against the undersigned in accordance with its
terms, subject to bankruptcy, insolvency and other laws affecting
creditors' rights and general equitable principles.
The obligations set forth herein shall terminate concurrently with any
termination of the Agreement.
---------------------
This Letter Agreement may be executed in two or more counterparts,
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same Letter Agreement.
--------------------
<PAGE> A--51
This Letter Agreement shall terminate concurrently with any
termination of the Agreement in accordance with its terms.
--------------------
The undersigned intend to be legally bound hereby.
Sincerely,
------------------------------------------
Name
------------------------------------------
Title
<PAGE> A--52
EXHIBIT 2
April 29, 1997
Primary Bank
35 Main Street
Peterborough, New Hampshire 03458
Ladies and Gentlemen:
Granite State Bankshares, Inc. ("Granite State") and Primary Bank
("Primary Bank") desire to enter into an agreement dated April 29, 1997
("Agreement"), pursuant to which, subject to the terms and conditions set
forth therein, (a) Primary Bank will merge with and into Granite Bank with
Granite Bank surviving the merger, and (b) shareholders of Primary Bank will
receive common stock of Granite State in exchange for common stock of
Primary Bank outstanding on the closing date (the foregoing, collectively,
referred to herein as the "Merger").
Primary Bank has requested, as a condition to its execution and
delivery to Granite State of the Agreement, that the undersigned, being
directors and executive officers of Granite State, execute and deliver to
Primary Bank this Letter Agreement.
Each of the undersigned, in order to induce Primary Bank to execute
and deliver to Granite State the Agreement, hereby irrevocably:
(a) Agrees to be present (in person or by proxy) at all meetings
of shareholders of Granite State called to vote for approval of the
Merger so that all shares of common stock of Granite State then owned
by the undersigned will be counted for the purpose of determining the
presence of a quorum at such meetings and to vote all such shares (i)
in favor of approval and adoption of the Agreement and the
transactions contemplated thereby (including any amendments or
modifications of the terms thereof approved by the Board of Directors
of Granite State), and (ii) against approval or adoption of any other
merger, business combination, recapitalization, partial liquidation or
similar transaction involving Granite State;
(b) Agrees not to vote or execute any written consent to rescind
or amend in any manner any prior vote or written consent, as a
shareholder of Granite State, to approve or adopt the Agreement;
(c) Agrees to use reasonable best efforts to cause the Merger to
be consummated;
(d) Agrees not to sell, transfer or otherwise dispose of any
common stock of Granite State on or prior to the record date for the
meeting of Granite State shareholders to vote on the Merger;
(e) Agrees not to sell, or in any other way reduce the risk of
the undersigned relative to, any shares of common stock of Granite
State or of common stock of Primary Bank, during the period commencing
thirty days prior to the effective date of the Merger and ending on
the date on which financial results covering at least thirty days of
post-Merger combined operations of Granite State and Primary Bank have
been published within the meaning of Section 201.01 of the Securities
and Exchange Commission's Codification of Financial Reporting
Policies; and
<PAGE> A--53
(f) Represents that the undersigned has the capacity to enter
into this Letter Agreement and that it is a valid and binding
obligation enforceable against the undersigned in accordance with its
terms, subject to bankruptcy, insolvency and other laws affecting
creditors' rights and general equitable principles.
The obligations set forth herein shall terminate concurrently with any
termination of the Agreement.
--------------------
This Letter Agreement may be executed in two or more counterparts,
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same Letter Agreement.
--------------------
This Letter Agreement shall terminate concurrently with any
termination of the Agreement in accordance with its terms.
--------------------
The undersigned intend to be legally bound hereby.
Sincerely,
------------------------------------------
Name
------------------------------------------
Title
<PAGE> A--54
EXHIBIT 3
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated April 29, 1997, between Primary Bank, a
New Hampshire savings bank ("Issuer") and Granite State Bankshares, Inc., a
New Hampshire corporation ("Grantee"). Capitalized terms used herein without
definition have the meanings specified in the Reorganization Agreement (as
hereinafter defined).
W I T N E S S E T H:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Reorganization dated April 29, 1997 (the "Reorganization Agreement"), which
agreement has been executed by the parties hereto prior to this Agreement;
and
WHEREAS, as a condition to Grantee's entering into the Reorganization
Agreement and in consideration therefor, Issuer has agreed to grant Grantee
the Option (as hereinafter defined):
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Reorganization
Agreement, the parties hereto agree as follows:
1.(a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms
hereof, up to 269,088 fully paid and nonassessable shares of its
common stock, par value $0.01 per share ("Common Stock"), at a price
of $22.75 per share (such price, as adjusted if applicable, the
"Option Price"); provided, however, that in the event Issuer issues or
agrees to issue any shares of Common Stock (other than as permitted
under the Reorganization Agreement) at a price less than $22.75 per
share, such Option Price shall be equal to such lesser price. The
number of shares of Common Stock that may be received upon the
exercise of the Option and the Option Price are subject to adjustment
as herein set forth.
(b) In the event that any additional shares of Common Stock are
issued or otherwise become outstanding after the date of this
Agreement (other than pursuant to this Agreement or the Reorganization
Agreement), the number of shares of Common Stock subject to the
Option shall be increased so that, after such issuance, it equals
12.9% of the number of shares of Common Stock then issued and
outstanding without giving effect to any shares subject or issued
pursuant to the Option. Nothing contained in this Section 1(b) or
elsewhere in this Agreement shall be deemed to authorize Issuer or
Grantee to breach any provision of the Reorganization Agreement.
(c) In the event that Primary Bank enters into an agreement as
to a Superior Acquisition Proposal (as defined in Section 6.01(c) of
the Reorganization Agreement), the total number of shares of Primary
Bank Common Stock issuable pursuant to Section 1(a) above shall be
reduced so that the aggregate dollar value of the difference between
(x) the aggregate Option Price to be paid by Granite State, and (x)
the aggregate Applicable Price (as defined in Section 8(c) hereof),
shall not exceed $2.5 million.
2.(a) The holder or holders of the Option (including Grantee or
any subsequent transferee(s)) (the "Holder") may exercise the Option,
in whole or part, if, but only if, both an Initial Triggering Event
(as hereinafter defined) and a Subsequent Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an
Exercise Termination Event (as hereinafter defined), provided
<PAGE> A--55
that the Holder shall have sent the written notice of such exercise
(as provided in subsection (e) of this Section 2) within 180 days
following the first such Subsequent Triggering Event. Each of the
following shall be an Exercise Termination Event: (i) the Company
Merger Effective Time (as defined in the Reorganization Agreement);
(ii) termination of the Reorganization Agreement in accordance with
the provisions thereof if such termination occurs prior to the
occurrence of an Initial Triggering Event; or (iii) the passage of
twelve months after termination of the Reorganization Agreement if
such termination follows or occurs at the same time as the occurrence
of an Initial Triggering Event.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer
Subsidiary"), without having received Grantee's prior written
consent, shall have entered into an agreement to engage in an
Acquisition Transaction (as hereinafter defined) with any person
(the term "person" for purposes of this Agreement having the
meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934, and the rules and regulations
thereunder (the "1934 Act")) other than Grantee or any of its
Subsidiaries (each a "Grantee Subsidiary"). For purposes of this
Agreement, "Acquisition Transaction" shall mean (x) a merger or
consolidation, or any similar transaction, involving Issuer or
any Significant Subsidiary (as defined in Rule 1-02 of
Regulation S-X promulgated by the SEC) of Issuer, (y) a
purchase, lease or other acquisition of all or substantially all
of the assets of Issuer or any Significant Subsidiary of Issuer,
or (z) a purchase or other acquisition (including by way of
merger, consolidation, share exchange or otherwise) of
beneficial ownership of securities representing 25% or more of
the voting power of Issuer or any Significant Subsidiary of
Issuer, provided that the term "Acquisition Transaction" does
not include any internal merger or consolidation involving only
Issuer and/or Issuer Subsidiaries;
(ii)(A) Any person other than Grantee, or any Grantee
Subsidiary, or any Issuer Subsidiary acting in a fiduciary
capacity (collectively, "Excluded Persons"), alone or together
with such person's affiliates and associates (as such terms are
defined in Rule 12b-2 under the 1934 Act) shall have acquired
beneficial ownership or the right to acquire beneficial
ownership of 25% or more of the outstanding shares of Common
Stock (the term "beneficial ownership" for purposes of this
Option Agreement having the meaning assigned thereto in Section
13(d) of the 1934 Act, and the rules and regulations thereunder)
or (B) any group (as such term is defined in Section 13(d)(3) of
the 1934 Act), other than a group of which only Excluded Persons
are members, shall have been formed that beneficially owns 25%
or more of the shares of Common Stock then outstanding;
(iii) The Board of Directors of Issuer shall have failed
to recommend to its stockholders the adoption of the
Reorganization Agreement or shall have withdrawn, modified or
changed its recommendation in a manner adverse to Grantee;
(iv) After a proposal is made by a third party (other than
an Excluded Person) to Issuer to engage in an Acquisition
Transaction, Issuer shall have intentionally and knowingly
breached any representation, warranty, covenant or agreement
contained in the Reorganization Agreement and such breach (x)
would entitle Grantee to terminate the Reorganization Agreement
pursuant to Section 6.01(b) therein (without regard to any grace
period provided for therein) and (y) shall not have been cured
prior to the Notice Date (as defined below); or
<PAGE> A--56
(v) Any person other than Grantee or any Grantee
Subsidiary, other than in connection with a transaction to which
Grantee has given its prior written consent, shall have filed an
application or notice with any federal or state bank regulatory
authority ("Regulatory Authority"), for approval to engage in an
Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of
the following events or transactions occurring after the date hereof:
(i) The acquisition by any person other than an Excluded
Person of beneficial ownership of 25% or more of the then
outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event
described in subparagraph (i) of subsection (b) of this Section
2.
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering
Event (together, a "Triggering Event"), it being understood that the
giving of such notice by Issuer shall not be a condition to the right
of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to
exercise the Option, it shall send to Issuer a written notice (the
date of which is herein referred to as the "Notice Date") specifying
(i) the total number of shares it will purchase pursuant to such
exercise and (ii) a place and date not earlier than three business
days nor later than 60 business days from the Notice Date for the
closing of such purchase (the "Closing Date"); provided that if prior
notification to or approval of any Regulatory Authority is required in
connection with such purchase, the Holder shall promptly file the
required notice or application for approval and shall expeditiously
process the same and the period of time that otherwise would run
pursuant to this sentence shall run instead from the date on which any
required notification periods have expired or been terminated or such
approvals have been obtained and any requisite waiting period or
periods shall have passed. Any exercise of the Option shall be deemed
to occur on the Notice Date relating thereto.
(f) At each closing referred to in subsection (e) of this
Section 2, the Holder shall pay to Issuer the aggregate purchase price
for the shares of Common Stock purchased pursuant to the exercise of
the Option in immediately available funds by wire transfer to a bank
account designated by Issuer, provided that failure or refusal of
Issuer to designate such a bank account shall not preclude the Holder
from exercising the Option.
(g) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (f) of this
Section 2, Issuer shall deliver to the Holder a certificate or
certificates representing the number of shares of Common Stock
purchased by the Holder and, if the Option should be exercised in part
only, a new Option evidencing the rights of the Holder thereof to
purchase the balance of the shares purchasable hereunder.
(h) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of
this Section 2 and the tender of the applicable purchase price in
immediately available funds, the Holder shall be deemed to be the
holder of record of the shares of Common Stock issuable upon such
exercise, notwithstanding that the stock transfer books of Issuer
shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder.
Issuer shall pay all expenses, and any and all United States federal,
<PAGE> A--57
state and local taxes and other charges that may be payable in
connection with the preparation, issue and delivery of stock
certificates under this Section 2 in the name of the Holder or its
assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free
from preemptive rights, sufficient authorized but unissued or treasury
shares of Common Stock so that the Option may be exercised without
additional authorization of Common Stock after giving effect to all
other options, warrants, convertible securities and other rights to
purchase Common Stock; (ii) that it will not, by charter amendment or
through reorganization, consolidation, merger, dissolution or sale of
assets, or by any other voluntary act, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Issuer; (iii)
promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting
and waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (y) in the event, under the
Change in Bank Control Act of 1978, as amended, or any state banking
law, prior approval of or notice to any state regulatory authority is
necessary before the Option may be exercised, cooperating fully with
the Holder in preparing such applications or notices and providing
such information to the any Regulatory Authority as they may require)
in order to permit the Holder to exercise the Option and Issuer duly
and effectively to issue shares of Common Stock pursuant hereto; and
(iv) promptly to take all action provided herein to protect the rights
of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office
of Issuer, for other Agreements providing for Options of different
denominations entitling the holder thereof to purchase, on the same
terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable
hereunder. The terms "Agreement" and "Option" as used herein include
any Stock Option Agreements and related Options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon
receipt by Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Agreement, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Agreement
if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer,
whether or not the Agreement so lost, stolen, destroyed or mutilated
shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares of
Common Stock that are purchasable upon exercise of the Option pursuant
to Section 1 of this Agreement, in the event of any change in Common
Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges
of shares, distributions, or the like, the type and number, and/or the
price, of shares of Common Stock purchasable upon exercise hereof
shall be appropriately adjusted, and proper provision shall be made in
the agreements governing such transaction so that the Holder shall
receive, upon exercise of the Option, the number and class of shares
or other securities or property that Holder would have received in
respect of the Common Stock if the Option had been exercised
immediately prior to such event, or the record date therefor, as
applicable.
6.(a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement (i) to consolidate with or merge
into any person, other than Grantee or one of its Subsidiaries, and
shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than Grantee
or one of its Subsidiaries, to merge into Issuer and Issuer
<PAGE> A--58
shall be the continuing or surviving corporation, but, in connection
with such merger, the then outstanding shares of Common Stock shall be
changed into or exchanged for stock or other securities of any other
person or cash or any other property or the then outstanding shares of
Common Stock shall after such merger represent less than 50% of the
outstanding shares and share equivalents of the merged company, or
(iii) to sell or otherwise transfer all or substantially all of its
assets to any person, other than Grantee or one of its Subsidiaries,
then, and in each such case, the agreement governing such transaction
shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions
set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that
controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing
or surviving corporation of a consolidation or merger with
Issuer (if other than Issuer), (ii) Issuer in a merger in which
Issuer is the continuing or surviving person, and (iii) the
transferee of all or substantially all of Issuer's assets.
(2) "Substitute Common Stock" shall mean the shares of
capital stock (or similar equity interest) with the greatest
voting power with respect of the election of directors (or other
persons similarly responsible for direction of the business and
affairs) of the issuer of the Substitute Option.
(3) "Assigned Value" shall mean the highest of (i) the
price per share of Common Stock at which a tender offer or
exchange offer therefor has been made, (ii) the price per share
of Common Stock to be paid by any third party pursuant to an
agreement with Issuer, or (iii) in the event of a sale of all or
substantially all of Issuer's assets, the sum of the price paid
in such sale for such assets and the current market value of the
remaining assets of Issuer as determined by a nationally
recognized investment banking firm selected by the Holder,
divided by the number of shares of Common Stock of Issuer
outstanding at the time of such sale. In determining the
market/offer price, the value of consideration other than cash
shall be determined by a nationally recognized investment
banking firm selected by the Holder.
(4) "Average Price" shall mean the average closing price
of a share of the Substitute Common Stock for the six months
immediately preceding the consolidation, merger or sale in
question, but in no event higher than the closing price of the
shares of Substitute Common Stock on the day preceding such
consolidation, merger or sale; provided that if Issuer is the
issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of Common Stock issued by the
person merging into Issuer or by any company which controls or
is controlled by such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms and
conditions as the Option, provided, that if any term or condition of
the Substitute Option cannot, for legal reasons, be the same as the
Option, such term or condition shall be as similar as possible and in
no event less advantageous to the Holder. The issuer of the Substitute
Option shall also enter into an agreement with the then Holder or
Holders of the Substitute Option in substantially the same form as
this Agreement, which shall be applicable to the Substitute Option.
<PAGE> A--59
(d) The Substitute Option shall be exercisable for such number
of shares of Substitute Common Stock as is equal to (i) the product of
(A) the Assigned Value and (B) the number of shares of Common Stock
for which the Option is then exercisable, divided by (ii) the Average
Price. The exercise price of the Substitute Option per share of
Substitute Common Stock shall then be equal to the Option Price
multiplied by a fraction the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and
the denominator of which shall be the number of shares of Substitute
Common Stock for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs,
shall the Substitute Option be exercisable for more than 12.9% of the
shares of Substitute Common Stock outstanding prior to exercise of the
Substitute Option.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 7 unless the Acquiring Corporation and
any person that controls the Acquiring Corporation assume in writing
all the obligations of Issuer hereunder.
7. The 180-day period for exercise of certain rights under
Section 2 shall be extended: (i) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights, and for the
expiration of all statutory waiting periods; and (ii) to the extent
necessary to avoid liability under Section 16(b) of the 1934 Act by
reason of such exercise.
8. Repurchase at the Option of Holder. (a) At the request of
Holder at any time commencing upon the first occurrence of a
Repurchase Event (as defined in Section 8(d)) and ending 12 months
immediately thereafter, Issuer shall repurchase from Holder (i) the
Option and (ii) all shares of Issuer Common Stock purchased by Holder
pursuant hereto with respect to which Holder then has beneficial
ownership. The date on which Holder exercises its rights under this
Section 8 is referred to as the "Request Date". Such repurchase shall
be at an aggregate price (the "Section 8 Repurchase Consideration")
equal to the sum of:
(i) the aggregate Option Price paid by Holder for any
shares of Issuer Common Stock acquired pursuant to the Option
with respect to which Holder then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as
defined below) for each share of Common Stock over (y) the
Option Price (subject to adjustment pursuant to Sections 1 and
5), multiplied by the number of shares of Common Stock with
respect to which the Option has not been exercised; and
(iii) the excess, if any, of the Applicable Price over the
Option Price (subject to adjustment pursuant to Sections 1 and
5) paid (or, in the case of Option Shares with respect to which
the Option has been exercised but the Closing Date has not
occurred, payable) by Holder for each share of Common Stock with
respect to which the Option has been exercised and with respect
to which Holder then has beneficial ownership, multiplied by the
number of such shares.
(b) If Holder exercises its rights under this Section 8, Issuer
shall, within 10 business days after the Request Date, pay the Section
8 Repurchase Consideration to Holder in immediately available funds,
and contemporaneously with such payment, Holder shall surrender to
Issuer the Option and the certificates evidencing the shares of Common
Stock purchased thereunder with respect
<PAGE> A--60
to which Holder then has beneficial ownership, and Holder shall
warrant that it has sole record and beneficial ownership of such
shares and that the same are then free and clear of all liens.
Notwithstanding the foregoing, to the extent that prior notification
to or approval of any federal or state regulatory authority is
required in connection with the payment of all or any portion of the
Section 8 Repurchase Consideration, Holder shall have the ongoing
option to revoke its request for repurchase pursuant to Section 8, in
whole or in part, or to require that Issuer deliver from time to time
that portion of the Section 8 Repurchase Consideration that it is not
then so prohibited from paying and promptly file the required notice
or application for approval and expeditiously process the same (and
each party shall cooperate with the other in the filing of any such
notice or application and the obtaining of any such approval). If any
federal or state regulatory authority disapproves of any part of
Issuer's proposed repurchase pursuant to this Section 8, Issuer shall
promptly give notice of such fact to Holder. If any federal or state
regulatory authority prohibits the repurchase in part but not in
whole, then Holder shall have the right (i) to revoke the repurchase
request or (ii) to the extent permitted by such regulatory authority,
determine whether the repurchase should apply to the Option and/or
Option Shares and to what extent to each, and Holder shall thereupon
have the right to exercise the Option as to the number of Option
Shares for which the Option was exercisable at the Request Date less
the sum of the number of shares covered by the Option in respect of
which payment has been made pursuant to Section 8(a)(ii) and the
number of shares covered by the portion of the Option (if any) that
has been repurchased. Holder shall notify Issuer of its determination
under the preceding sentence within five (5) business days of receipt
of notice of disapproval of the repurchase.
Notwithstanding anything herein to the contrary, all of Holder's
rights under this Section 8 shall terminate on the date of termination
of this Option pursuant to Section 2(a).
(c) For purposes of this Agreement, the "Applicable Price" means
the highest of (i) the highest price per share of Common Stock paid
for any such share by the person or groups described in Section
8(d)(i), (ii) the price per share of Common Stock received by holders
of Common Stock in connection with any merger or other business
combination transaction described in Section 6(a)(i), 6(a)(ii) or
6(a)(iii), or (iii) the highest closing bid price per share of Issuer
Common Stock quoted on the Nasdaq National Market System (or if Issuer
Common Stock is not quoted on the Nasdaq National Market System, the
highest bid price per share as quoted on the principal trading market
or securities exchange on which such shares are traded as reported by
a recognized source chosen by Holder) during the 40 business days
preceding the Request Date; provided, however, that in the event of a
sale of less than all of Issuer's assets, the Applicable Price shall
be the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of Issuer as determined
by a nationally recognized investment banking firm selected by Holder,
divided by the number of shares of Common Stock outstanding at the
time of such sale. If the consideration to be offered, paid or
received pursuant to either of the foregoing clauses (i) or (ii) shall
be other than in cash, the value of such consideration shall be
determined in good faith by an independent nationally recognized
investment banking firm selected by Holder and reasonably acceptable
to Issuer, which determination shall be conclusive for all purposes of
this Agreement.
(d) As used herein, "Repurchase Event" shall occur if, prior to
an Exercise Termination Event, (i) any person (other than Grantee or
any subsidiary of Grantee) shall have acquired beneficial ownership of
(as such term is defined in Rule 13d-3 promulgated under the Exchange
Act), or the right to acquire beneficial ownership of, or any "group"
(as such term is defined under the Exchange Act) shall have been
formed which beneficially owns or has the right to acquire beneficial
ownership of, 50% or more of the then outstanding shares of Issuer
Common Stock, or (ii) any of the transactions described in Section
6(a)(i), 6(a)(ii) or 6(a)(iii) shall have occurred.
<PAGE> A--61
9. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute
and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of
Issuer and, except for the approval by the requisite vote of the
Primary Bank shareholders, no other corporate proceedings on the
part of Issuer are necessary to authorize this Agreement or to
consummate the transactions so contemplated. This Agreement has
been duly and validly executed and delivered by Issuer. Subject
to the approval of the requisite vote of the Primary Bank
shareholders and the receipt of the required approvals from the
Regulatory Authorities described in Section 3.04 of the
Reorganization Agreement (and assuming the due authorization,
execution and delivery by both Granite State and Granite Bank,)
this Agreement is the valid and legally binding obligation of
Issuer.
(b) Issuer has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all times
from the date hereof through the termination of this Agreement in
accordance with its terms will have reserved for issuance upon the
exercise of the Option, that number of shares of Common Stock equal
to the maximum number of shares of Common Stock at any time and
from time to time issuable hereunder, and all such shares, upon
issuance pursuant hereto, will be duly authorized, validly issued,
fully paid, nonassessable, and will be delivered free and clear of
all claims, liens, encumbrance and security interests and not
subject to any preemptive rights.
(c) Issuer has taken all necessary action to exempt this
Agreement, and the transactions contemplated hereby and thereby
from, and this Agreement and the transactions contemplated hereby
and thereby are exempt from, (I) any applicable state takeover
laws, (ii) any state laws limiting or restricting the voting
rights of stockholders and (iii) any provision in its or any of
its subsidiaries' articles of agreement, certificate of
incorporation, charter or bylaws restricting or limiting stock
ownership of the voting rights of stockholders.
(d) The execution, delivery and performance of this Agreement
does not or will not, and the consummation by Issuer of any of the
transactions contemplated hereby will not, constitute or result in
(i) a breach or violation of, or a default under, its articles of
agreement or bylaws, or the comparable governing instruments of any
of its subsidiaries, or (ii) a breach or violation of, or a default
under, any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation of it or any of its subsidiaries
(with or without the giving of notice, the lapse of time or both)
or under any law, rule, ordinance or regulation or judgment,
decree, order, award or governmental or nongovernmental permit or
license to which it or any of its subsidiaries is subject, that
would, in any case referred to in this clause (ii), upon receipt of
approvals from Regulatory Authorities referred to in Section 3.04
of the Reorganization Agreement, give any other person the ability
to prevent or enjoin Issuer's performance under this Agreement in
any material respect, except for such violations, conflicts,
breaches or defaults under clause (i) or (ii) above which would
not, either individually or in the aggregate, have a Material
Adverse Effect on Primary Bank and its Subsidiaries taken as a
whole.
<PAGE> A--62
10. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has full corporate power and authority to
enter into this Agreement and, subject to any approvals or
consents referred to herein, to consummate the transactions
contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate
action on the part of Grantee. This Agreement has been duly
executed and delivered by Grantee.
(b) This Option is not being acquired with a view to the
public distribution thereof and neither this Option nor any
Option Shares will be transferred or otherwise disposed of
except in a transaction registered or exempt from registration
under applicable federal and state securities laws and
regulations.
11. Neither of the parties hereto may assign any of its rights
or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of
the other party, except (i) to any wholly-owned Subsidiary or (ii)
that in the event a Subsequent Triggering Event shall have occurred
prior to an Exercise Termination Event, Grantee, subject to the
express provisions hereof, may assign in whole or in part its rights
and obligations hereunder to one or more transferees.
12. Each of Grantee and Issuer will use its best efforts to make
all filings with, and to obtain consents of all third parties and
governmental authorities necessary to the consummation of the
transactions contemplated by this Agreement.
13. Notwithstanding anything to the contrary herein, in the
event that the Holder or any Related Person thereof is a person making
an offer or proposal to engage in an Acquisition Transaction (other
than the transactions contemplated by the Reorganization Agreement),
then in the case of a Holder or any Related Person thereof, the Option
held by it shall immediately terminate and be of no further force or
effect. A Related Person of a Holder means any Affiliate (as defined
in Rule 12b-2 of the rules and regulations under the 1934 Act) of the
Holder and any person that is the beneficial owner of 20% or more of
the voting power of the Holder.
14. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party
hereto and that the obligations of the parties hereto shall be
enforceable by either party hereto through injunctive or other
equitable relief.
15. If any term, provision, covenant or restriction contained in
this Agreement is held by a court or a federal or state regulatory
agency of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms, provisions and covenants and restrictions
contained in this Agreement shall remain in full force and effect, and
shall in no way be affected, impaired or invalidated. If for any
reason such court or regulatory agency determines that the Holder is
not permitted to acquire the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b)
or Section 5 hereof), it is the express intention of Issuer to allow
the Holder to acquire such lesser number of shares as may be
permissible, without any amendment or modification hereof.
<PAGE> A--63
16. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by cable, telegram, telecopy or telex, or by
registered or certified mail (postage prepaid, return receipt
requested) at the respective addresses of the parties set forth in the
Reorganization Agreement.
17. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Hampshire, regardless of
the laws that might otherwise govern under applicable principles of
conflicts of laws thereof.
18. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
19. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial
consultants, investment bankers, accountants and counsel.
20. Except as otherwise expressly provided herein, or in the
Reorganization Agreement, this Agreement contains the entire agreement
between the parties with respect to the transactions contemplated
hereunder and supersedes all prior arrangements or understandings with
respect thereof, written or oral. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer
upon any party, other than the parties hereto, and their respective
successors and, as permitted herein, assignees, any rights, remedies,
obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
21. Capitalized terms used in this Agreement and not defined
herein shall have the meanings assigned thereto in the Reorganization
Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement, as
amended, to be executed on its behalf by its officers, all as of the date
first above written.
PRIMARY BANK
BY: /s/ Christopher J. Flynn
Christopher J. Flynn
President and Chief Executive Officer
GRANITE STATE BANKSHARES, INC.
BY: /s/ Charles W. Smith
Charles W. Smith
President and Chief Executive Officer
<PAGE> A--64
EXHIBIT 4
FORM OF OPINION OF COUNSEL TO GRANITE STATE
Primary Bank shall have received from counsel to Granite State, an
opinion, dated as of the Closing Date, substantially to the effect that,
subject to normal exceptions and qualifications:
(a) Granite State and Granite Bank have full corporate power to
carry out the transactions contemplated in the Agreement and the Plan
of Merger, respectively. The execution and delivery of the Agreement
and the Plan of Merger and the consummation of the transactions
contemplated thereunder have been duly and validly authorized by all
necessary corporate action on the part of Granite State and Granite
Bank, and the Agreement and the Plan constitute valid and legally
binding obligations of Granite State and Granite Bank, respectively,
except as may be limited by bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship, and other laws affecting
creditors' rights generally and institutions the deposits of which are
insured by the FDIC, and as may be limited by the exercise of judicial
discretion in applying principles of equity. Subject to satisfaction
of the conditions set forth in the Agreement, neither the transactions
contemplated in the Agreement or the Plan, nor compliance by Granite
State and Granite Bank with any of the respective provisions thereof,
will (i) conflict with or result in a breach or default under (A) the
articles of agreement or bylaws of Granite State or the articles of
agreement or bylaws of Granite Bank, or, (B) to the knowledge of such
counsel, any note, bond, mortgage, indenture, license, agreement or
other material instrument or obligation to which Granite State or
Granite Bank is a party; or (ii) based on certificates of officers and
without independent verification, to the knowledge of such counsel,
result in the creation or imposition of any material lien or
encumbrance upon the property of Granite State or Granite Bank, except
such material lien, instrument or obligation that has been disclosed
pursuant to the Agreement or the Plan; or (iii) violate in any
material respect any order, writ, injunction or decree known to such
counsel, or any federal or New Hampshire statute, rule or regulation
applicable to Granite State or Granite Bank.
(b) Granite Bank is a validly existing bank organized and in
good standing under the laws of the State of New Hampshire. The
deposits of Granite Bank are insured to the maximum extent provided by
law by the Federal Deposit Insurance Corporation.
(c) There is, to the knowledge of such counsel, no legal,
administrative, arbitration or governmental proceeding or
investigation pending or threatened to which Granite State or Granite
Bank is a party which would, if determined adversely to Granite State
or Granite Bank, have a material adverse effect on the financial
condition or results of operation of Granite State and Granite Bank
taken as a whole, or which presents a claim to restrain or prohibit
the transactions contemplated by the Agreement and the Plan,
respectively.
(d) No consent, approval, authorization or order of any federal
or state court or federal or state governmental agency or body is
required for the consummation by Granite State or Granite Bank of the
transactions contemplated by the Agreement and the Plan, except for
such consents, approvals, authorizations or orders as have been
obtained.
(e) Upon the filing and effectiveness of the filings with the
appropriate New Hampshire authorities in accordance with the Agreement
and the Plan, the mergers of Granite State and Primary Bank and of
Granite Bank and Primary Bank contemplated by the Agreement and the
Plan, respectively, will have been effected in compliance with all
applicable federal and New Hampshire laws and regulations in all
material respects.
<PAGE> A--65
(f) The shares of Granite State Common Stock to be issued in
connection with the merger of Primary Bank and Granite State
contemplated by the Agreement have been duly authorized and will, when
issued in accordance with the terms of the Agreement, be validly
issued, fully paid and nonassessable, free and clear of any mortgage,
pledge, lien, encumbrance or claim (legal or equitable).
(g) On the sole basis of such counsel's participation in
conferences with officers and employees of Granite State in connection
with the Proxy Statement/Prospectus, and without other independent
investigation or inquiry, such counsel has no reason to believe that
the Proxy Statement/Prospectus, including any amendments or
supplements thereto (except for the financial information, financial
schedules and other financial or statistical data contained therein
and except for any information supplied by Primary Bank for inclusion
therein, as to which counsel need express no belief), as of the date
of mailing thereof, contained any untrue statement of a material fact
with respect to Granite State or omitted to state any material fact
with respect to Granite State necessary to make any statement therein
with respect to Granite State, in light of the circumstances under
which it was made, not misleading. Counsel may state in delivering
such opinion, that such counsel has not independently verified and
does not assume the responsibility for the accuracy, completeness or
fairness of any information or statements contained in the Proxy
Statement/Prospectus, except with respect to identified statements of
law or regulations or legal conclusions relating to Granite State or
the transactions contemplated in the Agreement and the Plan.
(h) Based on the Securities and Exchange staff's no-action
letter to Granite State dated ---------------------, 1997, it is our
opinion that the Granite State Common Stock to be acquired by
shareholders of Primary Bank in connection with the Merger are not
"restricted securities" as defined in Rule 144(a)(3) promulgated under
the Securities Act of 1934, as amended, and that holders of Primary
Bank Common Stock who are also affiliates of Primary Bank immediately
prior to completion of the Merger who receive Granite State Common
Stock in the Merger and who do not become affiliates of Granite State
are not issuers or dealers and should not be considered underwriters
as defined in Rule 145(c) or Section 2(11) of the Securities Act.
<PAGE> A--66
EXHIBIT 5
FORM OF TAX OPINION OF LUSE LEHMAN GORMAN POMERENK & SCHICK
Granite State and Primary Bank shall have received an opinion of Luse
Lehman Gorman Pomerenk & Schick substantially to the effect that, under the
provisions of the IRC:
1. Provided the Merger qualifies as a statutory merger under
applicable law, the transfer by Primary Bank of all of its assets to
Granite Bank in exchange for Granite State Common Stock (including
fractional share interests) and the assumption by Granite Bank of all
of Primary Bank's liabilities will constitute a reorganization within
the meaning of Section 368(a)(1)(A) of the IRC, by application of
Section 368(a)(2)(D) of the IRC.
2. Primary Bank, Granite State and Granite Bank will each be "a
party to a reorganization" within the meaning of Section 368(b) of the
IRC.
3. Neither Primary Bank nor Granite Bank will recognize any gain
or loss upon the transfer of Primary Bank's assets to Granite Bank in
exchange solely for Granite State Common Stock (including fractional
share interests) and the assumption by Granite State of the
liabilities of Primary Bank.
4. The basis of the Primary Bank assets in the hands of Granite
Bank will be in the same as the basis of such assets in the hands of
Primary Bank immediately prior to the Merger.
5. The holding period of the assets of Primary Bank in the hands
of Granite Bank will include the period during which the assets were
held by Primary Bank.
6. No gain or loss will be recognized by the shareholders of
Primary Bank on the receipt of Granite State Common Stock (including
fractional share interests) solely in exchange for their shares of
Primary Bank Common Stock.
7. The basis of the Granite State Common Stock (including
fractional share interests) to be received by the Primary Bank
shareholders in the Merger will be the same as the basis of the
Primary Bank Common Stock surrendered in exchange therefor.
8. The basis of the Granite Bank common stock to be held by
Granite State after the Merger will equal the basis of such stock
immediately before the Merger, increased by the net basis of Primary
Bank in the property acquired from it by Granite Bank.
9. The holding period of the Granite State Common Stock
(including fractional share interests) to be received by the Primary
Bank shareholders in the Merger will include the period during which
the Primary Bank shareholders held their Primary Bank Common Stock,
provided the shares of Primary Bank Common Stock are held as a capital
asset on the Effective Date.
10. The payment of cash in lieu of fractional share interests of
Granite State Common Stock will be treated as if the fractional share
interests were distributed as part of the Merger and then redeemed by
Granite State. Such cash payments will be treated as having been
received as distribution in full payment in exchange for the
fractional share interests redeemed, as provided in Section 302(a) of
the IRC.
<PAGE> A--67
11. As provided in Section 381(c)(2) of the IRC and related
Treasury regulations, Granite Bank will succeed to and take into
account the earnings and profits, or deficit in earnings and profits,
of Primary Bank as of the Effective Date. Any deficit in the earnings
and profits of Granite Bank or Primary Bank will be used only to
offset the earnings and profits accumulated after the Merger.
12. Pursuant to Section 381(a) of the IRC and related Treasury
regulations, Granite Bank will succeed to and take into account the
items of Primary Bank described in Section 381(c) of the IRC. Such
items will be taken into account by Granite State subject to the
conditions and limitations of Sections 381, 382, 383, and 384 of the
IRC and the Treasury regulations thereunder.
<PAGE> A--68
EXHIBIT 6
FORM OF OPINION OF COUNSEL TO PRIMARY BANK
Granite State shall have received from counsel to Primary Bank, an
opinion, dated as of the Closing Date, substantially to the effect that,
subject to normal exceptions and qualifications:
(a) Primary Bank has full corporate power to carry out the
transactions contemplated in the Agreement and the Plan of Merger,
respectively. The execution and delivery of the Agreement and the Plan
of Merger and the consummation of the transactions contemplated
thereunder have been duly and validly authorized by all necessary
corporate action on the part of Primary Bank. Subject to the receipt
of the requisite vote of Primary Bank shareholders and the receipt of
approvals from the Regulatory Authorities referred to in Section 3.04
of the Agreement (and assuming the due authorization, execution and
delivery by Granite State and Granite Bank), the Agreement and the
Plan constitute a valid and legally binding obligation, in accordance
with their respective terms, of Primary Bank, except as may be subject
to the conservatorship or receivership provisions of the FDIA, or the
insolvency and similar laws affecting creditors' rights generally and
institutions the deposits of which are insured by the FDIC, and as may
be subject, as to enforceability, to general principles of equity.
Subject to satisfaction of the conditions set forth in the Agreement,
neither the transactions contemplated in the Agreement and the Plan,
nor compliance by Primary Bank with any of the respective provisions
thereof, will (i) conflict with or result in a breach or default under
(A) the articles of agreement or bylaws of Primary Bank, or (B) based
on certificates of officers and without independent verification, to
the knowledge of such counsel, any note, bond, mortgage, indenture,
license, agreement or other instrument or obligation to which Primary
Bank is a party; or (ii) to the knowledge of such counsel, result in
the creation or imposition of any material lien, instrument or
encumbrance upon the property of Primary Bank, except such material
lien, instrument or obligation that has been disclosed to Granite
State pursuant to the Agreement and the Plan, or (iii) violate in any
material respect any order, writ, injunction, or decree known to such
counsel, or any statute, rule or regulation applicable to Primary
Bank.
(b) Primary Bank is a validly existing guaranty (stock) savings
bank organized and in good standing under the laws of the State of New
Hampshire. The deposits of Primary Bank are insured to the maximum
extent provided by law by the Federal Deposit Insurance Corporation.
(c) There is, to the knowledge of such counsel, no legal,
administrative, arbitration or governmental proceeding or
investigation pending or threatened to which Primary Bank is a party
which would, if determined adversely to Primary Bank, have a material
adverse effect on the business, properties, results of operations, or
condition, financial or otherwise, of Primary Bank or the Primary Bank
Subsidiaries taken as a whole or which presents a claim to restrain or
prohibit the transactions contemplated by the Agreement and the Plan,
respectively.
(d) No consent, approval, authorization, or order of any federal
or state court or federal or state governmental agency or body, or of
any third party, is required for the consummation by Primary Bank of
the transactions contemplated by the Agreement and the Plan, except
for such consents, approvals, authorizations or orders as have been
obtained or waived by Granite State.
(e) On the sole basis of such counsel's participation in
conferences with officers and employees of Primary Bank in connection
with the preparation of the Prospectus/Proxy Statement and without
other independent investigation or inquiry, such counsel has no reason
to believe that the
<PAGE> A--69
Prospectus/Proxy Statement, including any amendments or supplements
thereto (except for the financial information, financial statements,
financial schedules and other financial or statistical data contained
therein and except for any information supplied by Granite State for
inclusion therein, as to which counsel need express no belief), as of
the date of mailing thereof and as of the date of the meeting of
shareholders of Primary Bank to approve the merger, contained any
untrue statement of a material fact or omitted to state a material fact
necessary to make any statement therein, in light of the circumstances
under which it was made, not misleading. Counsel may state in delivering
such opinion, that such counsel has not independently verified and does
not assume any responsibility for the accuracy, completeness or fairness
of any information or statements contained in the Prospectus/Proxy
Statement, except with respect to identified statements of law or
regulations or legal conclusions relating to Primary Bank or the
transactions contemplated in the Agreement and the Plan.
<PAGE> A--70
APPENDIX B
FAIRNESS OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO.
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY & CO. INC. Institutional Brokerage
Research
Investment Banking
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209-1710
Telephone (703) 312-9500
Fax (703) 312-9501
August 8, 1997
Board of Directors
Granite State Bankshares, Inc.
122 West Street
Keene, New Hampshire 03431
Board of Directors:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR"), provide
you with its opinion as to the fairness, from a financial point of view, to
holders of common stock ("Stockholders") of Granite State Bankshares, Inc.
("Granite" or the "Company") of the Consideration (as hereinafter defined) to
be paid to the stockholders of Primary Bank ("Primary") pursuant to the
Agreement and Plan of Reorganization between Granite and Primary, dated April
29, 1997 (the "Reorganization Agreement") and a related Agreement and Plan of
Merger between Granite and Primary, dated April 29, 1997, as amended (the "Plan
of Merger" and together with the Reorganization Agreement, the "Merger
Agreement"), pursuant to which Primary will be merged with and into Granite
Bank, a wholly owned subsidiary of the Company (the "Merger"). The Merger
Agreement provides, among other things, that each issued and outstanding share
of common stock of Primary (other than those shares subject to dissenters'
rights) shall be converted into the right to receive from Granite shares of
Granite common stock based on the exchange ratio set forth in the
Reorganization Agreement, which ratio is subject to adjustment based on the
market price of Granite common stock prior to closing and certain other terms
and conditions (the "Consideration"). The Merger Agreement will be considered
at special meetings of the stockholders of the Company and Primary. The terms
of the Merger are more fully set forth in the Merger Agreement.
In delivering this opinion, FBR has completed the following tasks:
1. reviewed Primary's Annual Report to Stockholders for the fiscal
years ended December 31, 1995 and 1996 and Primary's Annual Reports
on Form F-2 filed with the Federal Deposit Insurance Corporation
("FDIC") for the fiscal years ended December 31, 1994 through 1996;
2. reviewed Granite's Annual Reports to Stockholders for the fiscal
years ended December 31, 1995 and 1996 and Granite's Annual Reports
on Form 10-KSB filed with the Securities and Exchange Commission
(the "SEC") for the fiscal years ended December 31, 1995 and 1996;
3. reviewed Primary's Quarterly Reports on Form F-4 for the fiscal
quarters ended March 31, June 30, and September 30, 1996 filed with
the FDIC;
4. reviewed Granite's Quarterly Reports on Form 10-QSB for the fiscal
quarters ended June 30 and September 30, 1996 filed with the SEC;
<PAGE> B-1
5. reviewed each of Granite's and Primary's unaudited financial
statements for the three months ended March 31, 1997;
6. reviewed the reported market prices and trading activity for
Granite's common stock for the period January 1994 through April
29, 1997 and reviewed the reported market prices and trading
activity for Primary's common stock for the period January 1994
through April 29, 1997;
7. discussed the financial condition, results of operations, business
and prospects of Granite and Primary with the managements of
Granite and Primary;
8. compared the results of operations and financial condition of
Granite and Primary with those of certain publicly-traded financial
institutions (or their holding companies) that FBR deemed to be
reasonably comparable to Granite or Primary, as the case may be;
9. participated in discussions and negotiations among representatives
of Primary and representatives of Granite;
10. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be reasonably
comparable;
11. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions entered into by Granite and
Primary;
12. reviewed a copy of the Merger Agreement; and
13. performed such other analysis and reviewed and analyzed such other
information as FBR deemed appropriate.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning Primary and Granite furnished to it by Primary or Granite, or the
publicly-available financial and other information regarding Primary, Granite
and other financial institutions (or their holding companies). FBR has assumed
that all such information is accurate and complete. FBR has further relied on
the assurance of management of Primary and Granite that they are not aware of
any facts that would make such financial or other information relating to such
entities inaccurate or misleading. With respect to financial forecasts for each
of Primary or Granite provided to FBR by their respective management, FBR has
assumed, for the purposes of this opinion, that the forecasts have been
reasonably prepared on bases reflecting the best available estimates and
judgments of such management at the time of preparation as to the future
financial performance of each such entity. FBR has assumed that there has been
no material change in Primary's or Granite's assets, financial condition,
result of operations, business or prospects since March 31, 1997. FBR did not
undertake an independent appraisal of the assets or liabilities of Primary nor
was FBR furnished with any such appraisals. FBR is not an expert in the
evaluation of allowances for loan losses, was not requested to and did not
review such allowances, and was not requested to and did not review any
individual credit files of Primary. FBR's conclusions and opinion are
necessarily based upon economic, market and other conditions and the
information made available to FBR as of the date of this opinion. FBR expresses
no opinion on matters of a legal, regulatory, tax or accounting nature related
to the Merger.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the
evaluation of transactions in connection with mergers and acquisitions of
commercial banks, savings institutions and financial institution holding
companies, initial and secondary
<PAGE> B-2
offerings, mutual-to-stock conversions of savings institutions, as well as
business valuations for other corporate purposes for financial institutions and
real estate related companies. FBR has experience in, and knowledge of, the
valuation of bank and thrift securities in New Hampshire and the rest of the
United States.
FBR has acted as a financial advisor to Granite in connection with the Merger
and will receive a fee for services rendered which is contingent upon the
consummation of the Merger. In the ordinary course of FBR's business, it may
effect transactions in the securities of Primary or Granite for its own account
and/or for the accounts of its customers and, accordingly, may at any time hold
long or short positions in such securities. From time to time, principals
and/or employees of FBR may also have positions in the securities.
Based upon and subject to the foregoing, as well as any such other matters as
we consider relevant, it is FBR's opinion, as of the date hereof, that the
Consideration is fair, from a financial point of view, to the Stockholders of
Granite.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: /s/ EUGENE S. WEIL
Eugene S. Weil
Senior Vice President
<PAGE> B-3
APPENDIX C
FAIRNESS OPINION OF NORTHEAST CAPITAL AND ADIVSORY, INC.
<PAGE>
[NORTH EAST CAPITAL & ADVISORY, INC. LETTERHEAD]
August 8, 1997
The Board of Directors
Primary Bank
35 Main Street
Peterborough, NH 03458
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Primary Bank ("Primary") of the range of
possible exchange ratios (as defined below) to be paid in the proposed merger
(the "Merger") of Primary, with and into Granite Bank, a wholly owned
subsidiary of Granite State Bankshares, Inc. (collectively "Granite State"),
pursuant to the Agreement and Plan of Merger, and the Agreement and Plan of
Reorganization, as amended (collectively the "Merger Agreement") dated April
29, 1997.
As more specifically set forth in the Merger Agreement, upon consummation
of the Merger, each issued and outstanding share of the common stock of
Primary, $0.01 par value per share ("Primary Common Stock"), except for any
dissenting shares and except for shares held by Granite State, will be entitled
to receive Merger consideration payable in shares of common stock, $1.00 par
value per share, of Granite State ("Granite State Common Stock"). The Merger
consideration will be based on the average closing bid price per share of
Granite State Common Stock during the 20 day trading period ending on the fifth
business day immediately preceding the effective date of the Merger (the
"Average GSBI Closing Price"). The exchange ratio will be equal to the quotient
of $25.25 divided by the Average GSBI Closing Price rounded to the nearest
ten-thousandth subject to the maximum and minimum collars described below
("Exchange Ratio").
If the Average GSBI Closing Price is less than $13.533 (adjusted to
reflect the 3 for 2 stock split of Granite State on May 9, 1997), then Primary
shall have the unilateral right to terminate the Merger Agreement. If the
Average GSBI Closing Price is equal to $13.533, but less than or equal to
$16.917, then Primary shall receive an Exhange Ratio equal to $25.25 divided by
the Average GSBI Closing Price. If the average GSBI Closing Price is greater
than $16.917, but less than or equal to $18.185, then Primary shall receive an
Exchange Ratio equal to $25.25 divided by $16.917. If the Average GSBI Closing
Price is greater than $18.185, then Primary shall receive an Exchange Ratio
equal to $27.144 divided by the Average GSBI Closing Price.
Northeast Capital & Advisory, Inc., as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate
and other purposes. We are familiar with Primary, having acted as its financial
advisor in connection with, and having participated in certain areas of the
negotiations leading to, the Merger Agreement. In the ordinary course of our
business, and the business of certain affiliates, including
<PAGE> C-1
our wholly owned broker dealer Northeast Capital Markets Corp. and Financial
Institutions Fund, LLC., we may hold securities of both Primary and Granite
State for our own account. We also have provided certain investment banking
services to Primary and Granite State in the past.
In connection with this opinion, we have reviewed, among other things,
the Joint Proxy Statement; the Merger Agreement; the Annual Reports to
Shareholders and the Annual Reports on Form 10-KSB of Granite State for the
three years ended December 31, 1996; the Annual Report to Shareholders on Form
F-2 of Primary for the year ending December 31, 1996; certain Quarterly Reports
to Shareholders and Quarterly Reports on Form 10-QSB of Granite State and on
Form F-4 of Primary; certain unaudited interim reports and certain press
releases to the respective shareholders of Primary and Granite State; and
financial information concerning the business and operations of Primary and
Granite State furnished to us by their respective managements. We also have
conducted discussions with members of the senior managements of Primary and
Granite State regarding the past and current business operations, regulatory
relationships, financial condition and future prospects of their respective
companies. In addition, we have reviewed the reported price and trading
activity of Granite State's and Primary's common stock; compared certain
financial information for Primary and Granite State with certain financial and
stock market information for certain other companies, the securities of which
are publicly traded; reviewed the financial terms of certain recent business
combinations in the commercial banking environment in particular; and performed
such other studies and analyses as we considered appropriate.
In conducting our review and arriving at our opinion, we relied upon and
assumed the accuracy and completeness of all of the financial and other
information provided to us or publicly available and we have not attempted
independently to verify such information. We have generally relied upon the
management of Primary and Granite State as to the reasonableness and
achievability of the financial and operating forecasts and projections (and the
assumptions and bases therefor) provided to us, and we have generally assumed
that such forecasts and projections reflect the best currently available
estimates and judgments of such managements and that such forecasts and
projections will generally be realized in the amounts and in the time periods
currently estimated by such managements. We have also assumed that the
aggregate allowance for loan losses for Primary and Granite State is adequate
to cover such losses. We have not made nor obtained any evaluations or
appraisals of the property of Primary or Granite State. We have, however,
independently examined certain individual loan credit files of Granite State
and independently produced projections and operating forecasts to assure
ourselves that the assumptions generated by management of Primary and Granite
State in their projections and forecasts do not materially and adversely alter
the adequacy of the financial consideration being exchanged by Primary
shareholders, from a financial point of view. Finally, you have informed us
that the Merger is intended to be accounted for as a pooling of interests
transaction under generally accepted accounting principles.
In conducting our analysis and arriving at our opinion as expressed
herein, we have considered such financial and other factors as we have deemed
appropriate in the circumstances. We have also taken into account our
assessment of general economic, market and financial conditions, our experience
in other transactions, and our knowledge of the banking industry in general. In
rendering our opinion, we have assumed that in the course of obtaining the
necessary regulatory approvals for the Merger, no conditions will be imposed
that will have a material adverse effect on the contemplated benefits of the
Merger to Primary. Our opinion is based upon information, conditions and
projections as they exist and can be evaluated on the date hereof.
<PAGE> C-2
Based upon and subject to the foregoing, it is our opinion that the
Exchange Ratio of the Merger as provided and described in the Merger Agreement
and the Joint Proxy Statement is fair, from a financial point of view, to
Primary and its stockholders.
Very truly yours,
/s/ NORTHEAST CAPITAL & ADVISORY, INC.
NORTHEAST CAPITAL & ADVISORY, INC.
<PAGE> C-3
APPENDIX D
NEW HAMPSHIRE REVISED STATUTES SECTION 293-A: 13.01-.31 AND 388:13
(THE "DISSENTERS' RIGHTS STATUTE")
<PAGE>
NEW HAMPSHIRE BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS
A. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
293-A:13.01 DEFINITIONS.--In this subdivision:
(1) "Corporation" means the issuer of the shares held by a
dissenter before the corporate action, or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RSA 293-A:13.02 and who exercises that right when
and in the manner required by RSA 293-A:13.20 through 293-A:13.28.
(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action, unless exclusion
would be inequitable.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently
paid by the corporation on its principal bank loans or, if none, at a
rate that is fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on
file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
293-A:13.02 RIGHT TO DISSENT.--(a) A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any
of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
(i) If shareholder approval is required for the merger by RSA
293-A:11.03 or the articles of incorporation and the shareholder is
entitled to vote on the merger; or
(ii) If the corporation is a subsidiary that is merged with
its parent under RSA 293-A:11.04.
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired,
if the shareholder is entitled to vote on the plan.
(3) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and
regular course of business, if the shareholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a
sale pursuant to court
<PAGE> D-1
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale.
(4) An amendment of the articles of incorporation that materially
and adversely affects rights in respect of a dissenter's shares because
it:
(i) Alters or abolishes a preferential right of the shares.
(ii) Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the
redemption or repurchase, of the shares.
(iii) Alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities.
(iv) Excludes or limits the right of the shares to vote on
any matter, or to cumulate votes, other than a limitation by
dilution through issuance of shares or other securities with
similar voting rights.
(v) Reduces the number of shares owned by the shareholder to
a fraction of a share if the fractional share so created is to be
acquired for cash under RSA 293-A:6.04.
(5) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this subdivision shall not challenge the corporate action creating his
entitlement, unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
293-A:13.03 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.--(a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered
in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
(1) He submits to the corporation the record shareholder's
written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the
vote.
B. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
293-A:13.20 NOTICE OF DISSENTERS' RIGHTS.--(a) If proposed corporate
action creating dissenters' rights under RSA 293-A:13.02 is submitted to a vote
at a shareholders' meeting, the meeting
<PAGE> D-2
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this subdivision and be accompanied by a copy of this
subdivision.
(b) If corporate action creating dissenters' rights under RSA 293-A:13.02
is taken without a vote of shareholders or by consent pursuant to RSA
293-A:7.04, the corporation shall notify in writing all shareholders entitled
to assert dissenters' rights that the action was taken and send them the
dissenters' notice described in RSA 293-A:13.22.
293-A:13.21 NOTICE OF INTENT TO DEMAND PAYMENT.--(a) If proposed
corporate action creating dissenters' rights under RSA 293-A:13.02 is submitted
to a vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights:
(1) Shall deliver to the corporation before the vote is taken
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(2) Shall not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this subdivision.
293-A:13.22 DISSENTERS' NOTICE.--(a) If proposed corporate action
creating dissenters' rights under RSA 293-A:13.02 is authorized at a
shareholders' meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of RSA 293-A:13.21.
(b) The dissenters' notice shall be sent no later than 10 days after
corporate action was taken, and shall:
(1) State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited.
(2) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received.
(3) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the terms of
the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial
ownership of the shares before that date.
(4) Set a date by which the corporation shall receive the payment
demand, which date shall not be fewer than 30 nor more than 60 days after
the date the notice is delivered.
(5) Be accompanied by a copy of this subdivision.
293-A:13.23 DUTY TO DEMAND PAYMENT.--(a) A shareholder sent a dissenters'
notice described in RSA 293-A:13.22 shall demand payment, certify whether he
acquired beneficial ownership of the shares before the date required to be set
forth in the dissenter's notice pursuant to RSA 293-A:13.22(b)(3), and deposit
his certificates in accordance with the terms of the notice.
<PAGE> D-3
(b) The shareholder who demands payment and deposits his share
certificates under subsection (a) retains all other rights of a shareholder
until these rights are cancelled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this subdivision.
293-A:13.24 SHARE RESTRICTIONS.--(a) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is taken or the restrictions
released under RSA 293-A:13.26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate
action.
293-A:13.25 PAYMENT.--(a) Except as provided in RSA 293-A:13.27, as soon
as the proposed corporate action is taken, or upon receipt of a payment demand,
the corporation shall pay each dissenter who complied with RSA 293-A:13.23 the
amount the corporation estimates to be the fair value of his shares, plus
accrued interest.
(b) The payment shall be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity
for that year, and the latest available interim financial statements, if
any;
(2) A statement of the corporation's estimate of the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under
RSA 293-A:13.28; and
(5) A copy of this subdivision.
293-A:13.26 FAILURE TO TAKE ACTION.--(a) If the corporation does not take
the proposed action within 60 days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under RSA 293-A:13.22 and repeat the payment demand
procedure.
293-A:13.27 AFTER-ACQUIRED SHARES.--(a) A corporation may elect to
withhold payment required by RSA 293-A:13.25 from a dissenter, unless he was
the beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders
of the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall pay
<PAGE> D-4
this amount to each dissenter who agrees to accept it in full satisfaction of
his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest
was calculated, and a statement of the dissenter's right to demand payment
under RSA 293-A:13.28.
293-A:13.28 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.--(a) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate, less any payment under RSA 293-A:13.25, or reject the
corporation's offer under RSA 293-A:13.27 and demand payment of the fair value
of his shares and interest due, if:
(1) The dissenter believes that the amount paid under RSA
293-A:13.25 or offered under RSA 293-A:13.27 is less than the fair value
of his shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under RSA 293-A:13.25
within 60 days after the date set for demanding payment;or
(3) The corporation, having failed to take the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the
date set for demanding payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection
(a) within 30 days after the corporation made or offered payment for his
shares.
C. JUDICIAL APPRAISAL OF SHARES
293-A:13.30 COURT ACTION.--(a) If a demand for payment under RSA
293-A:13.28 remains unsettled, the corporation shall commence a proceeding
within 60 days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the 60-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the superior court
of the county where a corporation's principal office, or, if none in this
state, its registered office, is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(c) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled parties to the proceeding as in
an action against their shares and all parties shall be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend decisions on the
question of their value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
<PAGE> D-5
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) For the amount, if any, by which the court finds the fair value
of his shares, plus interest, exceeds the amount paid by the corporation;
or,
(2) For the fair value, plus accrued interest, of his
after-acquired shares for which the corporation elected to withhold
payment under RSA 293-A:13.27.
293-A:13.31 COURT COSTS AND COUNSEL FEES.--(a) The court in an appraisal
proceeding commenced under RSA 293-A:13.30 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under RSA 293-A:13.28.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially comply with the
requirements of RSA 293-A:13.20 through RSA 293-A:13.28.
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this subdivision.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
<PAGE> D-6
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20549
FORM F-2
ANNUAL REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended FDIC Certificate Number
December 31, 1996 18016
PRIMARY BANK
(Exact name of Bank as specified in its charter)
New Hampshire
(State or other jurisdiction of incorporation or organization)
02-0178110
(I.R.S. Employer
Identification No.)
35 MAIN STREET
PETERBOROUGH, NEW HAMPSHIRE
(Address of principal office)
03458
(Zip Code)
(603) 924-7142
(Bank's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITEIS REGISTERED UNDER SECTION 12(g) OF THE ACT:
Title of Class
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 10
is not contained herein, and will not be contained, to the best of the Bank's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form F-2 or any amendment of this Form F-2. [X]
Indicate by check mark whether the Bank (1) has filed all reports required to
be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Bank was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Bank, based on the closing sale price for the Bank's Common Stock on February
28, 1997, as reported by NASDAQ, was $31.6 million.
The number of shares outstanding of each of the Bank's classes of Common Stock
as of the latest practicable date:
CLASS: COMMON STOCK, PAR VALUE $0.01 PER SHARE
OUTSTANDING AS OF FEBRUARY 28, 1997 2,087,342 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Primary Bank Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Part II of this Form F-2.
Portions of the Primary Bank Notice of Annual Meeting and Proxy Statement for
the Annual Meeting of Shareholders to be held on May 28, 1997 are incorporated
by reference into Parts I and III of this Form F-2.
Portions of the Primary Bank Registration Statement on Form F-1 are
incorporated by reference into Part IV of this Form F-2.
<PAGE>
PART I
ITEM 1. Business
On April 15, 1995, Horizon Bank and Trust, a New Hampshire chartered bank,
merged with and into the Bank, with the Bank surviving and concurrently
changing its name from Peterborough Savings Bank to Primary Bank. Primary Bank
(the "Bank") is engaged principally in the business of attracting deposits from
the general public; originating residential, construction, commercial and
industrial loans, commercial real estate loans and other consumer loans and
investing in debt and equity securities. The Bank is headquartered in
Peterborough, New Hampshire and conducts its business through ten retail
banking offices located in Hillsborough, Cheshire and Merrimack counties. The
Bank was chartered in 1859 and its presence in the market area is well
established. The historical focus of the Bank's lending efforts has been real
estate loans, but since 1991 the Bank has expanded its efforts to commercial
and industrial lending. As of December 31, 1996, the Bank employed 174
individuals on a full-time equivalent basis.
The following sections present financial information pertaining to the Bank's
investment securities portfolio, loan portfolio, non-performing assets,
deposits and other liabilities, borrowed funds and stockholders' equity.
INVESTMENT SECURITIES
The Board of Directors establishes the investment policy of the Bank. This
policy dictates that investment decisions will be made based on the safety of
the investment, liquidity requirements of the Bank and potential return on the
investments. The Board of Directors delegates authority to its Investment
Committee, which in turn delegates authority to certain officers to carry out
the Bank's investment policy.
The Bank's current investment securities policy permits investments in certain
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies, mortgage-backed securities, banker's acceptances of
approved financial institutions, investment grade corporate bonds, commercial
paper and federal funds (A- or above). The Bank currently does not participate
in hedging programs or interest rate swaps and does not invest in
non-investment grade bonds.
The purpose of the investment policy is to establish a framework within which
the Bank may maximize earnings potential by acquiring assets (other than direct
loans) within guidelines designed to: (i) enhance profitability by maintaining
an acceptable spread over the cost of funds; (ii) absorb funds when loan demand
is low and infuse funds when demand is high, (iii) provide the regulatory and
operational liquidity necessary to conduct the business activities of the Bank;
(iv) provide relatively low risk assets to the balance sheet; (v) provide a
medium for the implementation of certain interest rate risk management measures
intended to establish and maintain an appropriate balance between the
sensitivity to changes in interest rates of interest income from loans and
investments, and interest expense from deposits and borrowings; (vi) provide
collateral for pledging requirements; and (vii) generate a favorable return on
investments without undue compromise of other objectives.
The Bank designates securities as held to maturity or available for sale. It is
the Bank's policy that there will not be a securities trading account. The
Bank's current policies require any securities that Management does not have
the positive intent to hold to maturity to be classified as available for sale
and recorded at the lower of cost or market value. At December 31, 1996, the
portfolio at cost was $159.0 million compared to $118.2 million at December 31,
1995. The yield on the portfolio for 1996 was 6.13% compared to 5.89% in 1995.
At December 31, 1996, the securities avalilable for sale portfolio had a net
unrealized loss excluding tax effects of $631,000 compared to a $228,000 net
unrealized gain in 1995.
<PAGE> 2
In the following table, the carrying value of debt securities maturing within
stated periods as of December 31, 1996 is shown with related weighted average
interest rates. The table below also sets forth certain information regarding
the book value, weighted average yield and maturities of the Bank's debt and
mortgage-backed securities held for investment and available for sale at
December 31, 1996.
<TABLE>
<CAPTION>
Within 1 year 1-5 Years 5-10 Years
------------------------ ------------------------- -------------------------
Weighted Weighted Weighted
Book Average Market Book Average Market Book Average Market
Value Yield<F1> Value Value Yield<F1> Value Value Yield<F1> Value
----- --------- ------ ------ --------- ------ ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities held to maturity:
U.S.Government Agencies -- -- -- 3,997 6.02% 3,967 54,214 6.85% 53,856
SBA Securities -- -- -- 296 8.62% 302 120 6.96% 120
Municipal securities<F1> -- -- -- 126 6.59% 126 -- -- --
--------------------------------------------------------------------------------
Total debt securities held to maturity -- -- -- 4,419 6.21% 4,395 54,334 6.85% 53,976
--------------------------------------------------------------------------------
Total securities available for sale:
U.S. Gov't Agencies 1,000 9.00% 1,005 11,999 5.91% 11,782 -- -- --
Corporate and Other -- -- -- 999 6.23% 987 -- -- --
Mortgage-backed securities:
Fannie Mae -- -- -- -- -- -- -- -- --
Freddie Mac 48 5.83% 48 -- -- -- 994 6.14% 970
Ginnie Mae -- -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Total mortgage-backed securities 48 5.83% 48 -- -- -- 994 6.14% 970
Marketable equity securities 409 5.53% 465 -- -- -- -- -- --
--------------------------------------------------------------------------------
Total securities available for sale 1,457 7.92% 1,518 12,998 5.94% 12,769 994 6.14% 970
--------------------------------------------------------------------------------
Mortgage-backed securities held to maturity:
Fannie Mae -- -- -- -- -- -- 1,873 7.08% 1,832
Freddie Mac -- -- -- -- -- -- -- -- --
Ginnie Mae -- -- -- -- -- -- -- -- --
Other -- -- -- -- -- -- 424 5.16% 413
--------------------------------------------------------------------------------
Total mortgage-backed securities held to
maturity -- -- -- -- -- -- 2,297 6.73% 2,245
--------------------------------------------------------------------------------
Total securities 1,457 7.92% 1,518 17,417 6.01% 17,164 57,625 6.83% 57,191
================================================================================
<CAPTION>
Over 10 Years Total
------------------------- ---------------------------
Weighted Weighted
Book Average Market Book Average Market
Value Yield<F1> Value Value Yield<F1> Value
------ --------- ------ ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities held to maturity:
U.S.Government Agencies -- -- -- 58,211 6.80% 57,823
SBA Securities 595 7.88% 593 1,011 7.99% 1,015
Municipal securities<F1> 295 7.31% 295 421 7.10% 421
-------------------------------------------------------
Total debt securities held to maturity 890 7.69% 888 59,643 6.82% 59,259
-------------------------------------------------------
Total securities available for sale:
U.S. Gov't Agencies -- -- -- 12,999 6.15% 12,787
Corporate and Other -- -- -- 999 6.23% 987
Mortgage-backed securities:
Fannie Mae 33,284 6.14% 33,110 33,284 6.14% 33,110
Freddie Mac 31,360 6.21% 31,163 32,402 6.21% 32,181
Ginnie Mae 3,577 5.84% 3,509 3,577 5.84% 3,509
-------------------------------------------------------
Total mortgage-backed securities 68,221 6.16% 67,782 69,263 6.16% 68,800
Marketable equity securities -- -- -- 409 5.53% 465
-------------------------------------------------------
Total securities available for sale 68,221 6.16% 67,782 83,670 6.15% 83,039
-------------------------------------------------------
Mortgage-backed securities held to maturity:
Fannie Mae 5,157 6.61% 5,089 7,030 6.74% 6,921
Freddie Mac 1,000 5.77% 901 1,000 5.77% 901
Ginnie Mae 7,227 7.37% 7,226 7,227 7.37% 7,226
Other -- -- -- 424 5.16% 413
-------------------------------------------------------
Total mortgage-backed securities held to
maturity 13,384 6.95% 13,216 15,681 6.92% 15,461
-------------------------------------------------------
Total securities 82,495 6.30% 81,886 158,994 6.48% 157,759
=======================================================
<FN>
- -------------------
<F1> Weighted average yield is the coupon yield and not the tax equivalent
yield.
</FN>
</TABLE>
<PAGE> 3
LOAN PORTFOLIO
The Bank's lending activities traditionally have been focused on the
origination of first mortgage loans for the purchase, construction and
refinancing of residential properties in its market area. In addition, the Bank
provides commercial real estate financing, commercial and industrial loans, SBA
loans to small business, home equity loans, and consumer and installment loans
in its market area.
During 1996, the asset mix of the Bank's loan portfolio continued to emphasize
commercial lending. Total commercial, business and multifamily loans increased
from $140.2 million or 60.1% of total loans in 1995 to $147.3 million or 62.5%
of total loans in 1996. Commercial loans increased by $12.8 million which was
partially offset by a net reduction of $5.7 million in the government
guaranteed purchased loan portfolio. These loans were sold in order to reduce
prepayment risk. Residential lending including home equity and second mortgage
loans decreased by $6.4 million during this period to $77.9 million or 33.1 %
of the total loan portfolio.
The following table sets forth the composition of the Bank's loan portfolio in
dollar amount and in percentages of the respective portfolios at the dates
indicated.
<TABLE>
<CAPTION>
At December 31
1996 1995 1994
(Dollars in Thousands)
% of % of % of
Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to-four-family $ 63,850 27.11% $ 69,681 29.86% $ 70,156 32.82%
Construction 2,325 .99 642 .28 3,332 1.56
Commercial 78,884 33.49 69,509 29.79 58,650 27.43
Multifamily 14,746 6.26 8,760 3.75 6,833 3.20
-----------------------------------------------------------------
Total Mortgage loans $ 159,805 67.85% $ 148,592 63.68% $ 138,971 65.01%
-----------------------------------------------------------------
Other loans:
Business 53,694 22.80% 61,961 26.55% 47,718 22.32%
Second Mortgages 2,040 .86 1,749 .75 1,034 .49
Home equity 11,989 5.09 12,894 5.53 14,606 6.83
Consumer:
Consumer or installment 7,617 3.23 7,757 3.32 11,056 5.17
Lines of credit 392 .17 395 .17 390 .18
-----------------------------------------------------------------
Total other loans $ 75,732 32.15% $ 84,756 36.32% $ 74,804 34.99%
-----------------------------------------------------------------
Total loans gross $ 235,537 100.00% $ 233,348 100.00% $ 213,775 100.00%
=================================================================
Allowance for loan losses 2,577 3,447 2,850
--------- --------- ---------
Loans receivable, net $ 232,960 $ 229,901 $ 210,925
========= ========= =========
</TABLE>
<PAGE> 4
LOAN MATURITY
The following table shows the contractual maturities of the Bank's commercial
real estate and construction loan portfolio at December 31, 1996. The table
does not include prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
Multifamily
and
Commercial Construction
----------- ------------
(In Thousands)
<S> <C> <C>
Amounts due:
Within one year $ 7,049 $ 2,325
After one year:
One to five years 14,126 --
Over five years 72,455 --
------------------------
Total $ 93,630 $ 2,325
========================
</TABLE>
The following table sets forth, at December 31, 1996, the dollar amount of all
fixed rate loans contractually due after December 31, 1997, and all adjustable
rate loans repricing after December 31, 1997.
<TABLE>
<CAPTION>
Multifamily
and
Commercial Construction
----------- ------------
(In Thousands)
<S> <C> <C>
Fixed $ 26,877 $ 143
Adjustable 13,369 --
-----------------------
Total $ 40,246 $ 143
=======================
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through charges to the Bank's
earnings. Loan losses when recognized, and recoveries when received, are
charged or credited directly to the allowance. The adequacy of the allowance
for loan losses is determined by management's analysis of: (i) the Bank's loan
portfolio in order to identify problem loans and potential losses estimated on
the basis of current economic conditions both nationally and in the Bank's
local market area; (ii) historical loan loss experience, (iii) the results of
the Bank's internal loan review program; and (iv) reports received from the
various regulatory agencies.
The Bank utilizes three methods by which to measure the adequacy of its
allowance. In the first method, all loans are graded in accordance with
objective credit criteria. Based upon these grades, the loan portfolio is then
segregated into "pools of risk" by loan category, i.e., one-to-four family
residential real estate, commercial real estate, multi-family, consumer and
other home equity loans and business loans. The Bank then sets estimated loss
percentages which, from time to time, may be adjusted to reflect the estimated
total principal loss exposure to the Bank reflected in such common "pools of
risk". The total of the applicable percentage when multiplied by the total of
loans in the pool establishes the amount of the allowance allocated to such
"pool of risk". In the second method, the Bank calculates a historical
percentage of charged-off loans for the three preceding years, net of
recoveries, as a percentage of average loans outstanding by loan type. This
percentage is then applied to the loan totals outstanding by loan type and,
based upon this percentage, an allowance is calculated. Under the third method,
the Bank computes the historical percentage of charged-off loans for the
current year, annualized net of recoveries, calculated as a percentage of
average loans outstanding by loan type. This percentage is then applied to the
loan totals outstanding by loan type and, based upon this percentage, an
allowance is calculated.
<PAGE> 5
These calculations produce three different allowance measures. Bank management
then determines the appropriate allowance. The actual allowance is expected to
fall within the range of the above calculated allowances and reflects factors
such as general economic conditions affecting the collectability of the Bank's
loans and exposures to an industry experiencing unusual economic problems.
The following table sets forth the Bank's allowance for loan losses at
the dates indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 3,447 $ 2,850 $ 2,946
Provision for loan losses 722 2,602 432
Loans charged-off:
Residential real estate 555 360 164
Commercial real estate 724 1,436 384
Other commercial 225 319 329
Other 323 53 48
-------------------------------
Total loans charged-off 1,827 2,168 925
Recoveries:
Residential real estate 33 33 35
Commercial real estate 38 73 199
Other commercial 102 48 147
Other 62 9 16
-------------------------------
Total recoveries 235 163 397
Net charge-offs 1,592 2,005 528
-------------------------------
Allowance for loan losses at end of year $ 2,577 $ 3,447 $ 2,850
===============================
Ratio of net charge-offs during the year to average loans
outstanding during the year .70% .90% .24%
Ratio of allowance for loan losses to total gross loans 1.09% 1.48% 1.33%
Ratio of allowance for loan losses to total non-performing
loans at the end of year 124.85% 58.33% 65.62%
Ratio of recoveries to charge-offs 12.86% 7.52% 42.92%
Ratio of net charge-offs to average allowance for loan losses 53.95% 66.30% 17.82%
</TABLE>
<PAGE> 6
The Bank's allowance for loan losses has been established as a general
allowance for future losses on its entire portfolio. The Bank does not allocate
the allowance among loan classifications. In the following table, the allowance
for loan losses has been allocated by category for purposes of complying with
disclosure requirements. The amount allocated on the following table to any
category should not be interpreted as an indication of future charge-offs, and
the amounts allocated are not intended to reflect the amount that may be
available for future losses on any category since the Bank's allowance is a
general allowance. The table also sets forth the percent of loans in each
category of total loans.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
(Dollars in Thousands)
1996 1995 1994
------------------ ------------------ ------------------
Percent Percent Percent
of total of total of total
gross gross gross
Amount Loans Amount Loans Amount Loans
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Loan category:
Residential and construction loans $ 698 28.09% $ 1,152 30.14% $ 976 34.38%
Commercial real estate and commercial 1,799 62.55 2,035 60.09 1,790 52.95
Other loans 80 9.36 260 9.77 84 12.67
-------------------------------------------------------------
Total $ 2,577 100.00% $ 3,447 100.00% $ 2,850 100.00%
=============================================================
</TABLE>
While management considers the allowance for loan losses to be adequate at
December 31, 1996, there is no assurance that additional charge-offs and
provisions will not be necessary in 1997.
POTENTIAL PROBLEM LOANS AND CLASSIFICATION OF ASSETS
The Bank has a system for classification of loans and other assets, such as
debt and equity securities, considered to be of lesser quality, as
"substandard", "doubtful", or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the paying capacity and net
worth of the obligor or the collateral pledged, if any. "Substandard" assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard", with the added characteristic that the weaknesses
present make collection or liquidation in full "highly questionable and
improbable" on the basis of currently existing facts, conditions and values.
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of
specific loss reserve is not warranted. When the Bank classifies problem assets
as "loss", it is required to charge-off such amount. Assets which do not
currently expose the Bank to a sufficient degree of risk to warrant
classification in one of the aforementioned categories but possess credit
deficiencies or potential weaknesses are designated "special mention" which are
not considered classified assets.
An institution's determination as to the classification of its assets and the
amount of its valuation allowance is subject to review by the FDIC and the New
Hampshire Bank Commissioner, which can require classification and the
establishment of additional loss allowances. The Bank regularly reviews the
assets in its portfolio to determine whether any assets require classification
in accordance with applicable regulations.
The total amount of loans past due 60 days or more, excluding non-accruing
loans, at December 31, 1996, 1995, and 1994, amounted to $934,000, $1.4
million, and $2.7 million, respectively, and represented .40% .60%, and 1.27%,
respectively, of loans outstanding.
<PAGE> 7
The following table represents information regarding non-performing loans and
assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual mortgage loans $ 1,873 $ 5,259 $ 3,845
Non-accrual other loans 191 650 498
-------------------------------
Total non-accrual loans<F1> 2,064 5,909 4,343
-------------------------------
Total non-performing loans 2,064 5,909 4,343
Real estate held for investment -- -- $ 860
Foreclosed real estate, net 1,980 2,088 4,455
-------------------------------
Total non-performing assets $ 4,044 $ 7,997 $ 9,658
===============================
Non-performing loans to total gross loans .88% 2.53% 2.03%
Non-performing assets to total assets .95% 2.09% 2.70%
<FN>
- -------------------
<F1> Loans are placed in non-accrual status when they become contractually
past due 90 days or more, or there is reasonable doubt as to the full and
timely payment of principal and interest. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is reversed in
the current period against interest income. Interest accrued is resumed
only when management's analysis determines that the loans are fully
collectible as to principal and interest.
</FN>
</TABLE>
If all non-accrual and impaired loans had been performing in accordance with
their original terms and had been outstanding from the earlier of the beginning
of the period or origination, the Bank would have recorded interest income of
$416,000, $699,000, and $674,000 for the years ended December 31, 1996, 1995,
and 1994, respectively, as opposed to $95,000, $242,000, and $183,000 which
actually was included in interest income for such periods.
DEPOSITS
Deposits generated from within the Bank's local market area are the primary
source of funds for the Bank's lending and investment operations. The Bank
offers its customers a tiered deposit program and prices its products
competitively within its market area. In addition to savings deposits, NOW and
money market deposits, the Bank offers several consumer and business checking
account programs to meet the individual needs of its customers. Substantially
all of the Bank's deposits are derived from customers who work or reside in the
Bank's market area.
Deposit levels remained largely flat in 1996 increasing $1.5 million from
$303.6 million at year end 1995 to $305.1 million at year end 1996. NOW
accounts and term deposits increased by $4.7 million and $2.1 million,
respectively, while money market and demand deposits declined $2.8 million and
$2.1 million, respectively. Demand deposit declines were attributable in part
to customers moving funds into the Bank's repurchase products which increased
by $9.7 million to $33.4 million at year end 1996.
<PAGE> 8
The following table sets forth the distribution of the Bank's deposit accounts
at the dates indicated and the weighted average nominal interest rates on each
category of deposits presented. For average deposit information, see average
balance sheet and net interest income and analysis table.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- -------------------------------
(Dollars in Thousands)
Percent Weighted Percent Weighted Percent Weighted
of total Average of total Average of total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
--------- -------- -------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts $ 51,036 16.73% 2.47% $ 51,438 16.94% 2.47% $ 62,003 22.17% 2.81%
Term deposit accounts 155,128 50.85% 5.57% 153,034 50.40% 5.87% 111,883 40.00% 4.92%
Money market accounts 25,915 8.49% 2.64% 28,699 9.45% 2.77% 43,476 15.54% 2.73%
NOW accounts 41,544 13.62% 1.39% 36,892 12.15% 1.58% 36,681 13.11% 1.55%
Demand deposits 31,467 10.31% 0.00% 33,569 11.06% 0.00% 25,693 9.18% 0.00%
------------------------------------------------------------------------------------------------
Total deposits $ 305,090 100.00% 3.66% $ 303,632 100.00% 3.83% $ 279,736 100.00% 3.22%
================================================================================================
</TABLE>
DOMESTIC TIME DEPOSITS OF $100 THOUSAND OR MORE
Domestic time deposits in denominations of $100 thousand or more and the
related maturities at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Less than Three Six to Over
Three to six twelve twelve
months months months months Total
--------- ------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Time certificates of deposit $ 3,635 $ 3,760 $ 2,976 $ 7,277 $ 17,648
Other time deposits $ 14,376 $ -- $ -- $ -- $ 14,376
</TABLE>
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS
Although deposits are the Bank's primary source of funds, the Bank also
utilizes borrowings from the Federal Home Loan Bank (FHLB) of Boston as an
alternative funding source when appropriate. Such advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. Management believes that if FHLB borrowings are not
available in the future there could be a negative impact on the Bank's
earnings. At December 31, 1996, the Bank had $58.5 million of borrowings from
the FHLB of Boston.
Reverse repurchase agreements are accounted for as borrowings by the Bank and
are secured by designated securities. The proceeds of these transactions are
used to meet cash flow or asset/liability needs of the Bank.
<PAGE> 9
The following table sets forth certain information regarding repurchase
agreements and borrowed funds at or for the dates indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Repurchase agreements:
Average balance outstanding $ 26,493 $ 20,117 $ 8,146
Maximum amount outstanding at any month-end during the period 34,114 28,159 17,145
Balance outstanding at end of period 33,426 23,769 17,145
Weighted average interest rate during the period 4.84% 5.26% 4.31%
Weighted average interest rate at end of period 4.87% 4.75% 5.22%
FHLB of Boston advances:
Average balance outstanding 48,288 38,296 53,752
Maximum amount outstanding at any month-end during the period 59,469 55,659 69,604
Balance outstanding at end of period 58,499 27,771 34,911
Weighted average interest rate during the period 5.71% 6.16% 4.48%
Weighted average interest rate at end of period 5.81% 6.05% 5.29%
Total borrowings
Average balance outstanding 74,781 58,413 61,898
Maximum amount outstanding at any month-end during the period 92,096 70,547 76,244
Balance outstanding at end of period 91,925 51,480 52,056
Weighted average interest rate during the period 5.40% 5.85% 4.45%
Weighted average interest rate at end of period 5.47% 5.45% 5.26%
</TABLE>
At December 31, 1996, the Bank had outstanding $58.5 million in borrowings
from the FHLB of Boston maturing as follows:
<TABLE>
<CAPTION>
At December 31, 1996
----------------------
(Dollars in Thousands)
Average
Amount Rate
-------- -------
<S> <C> <C>
One year or less $ 42,181 5.82%
One to three years 16,318 5.78%
------------------
$ 58,499 5.81%
==================
</TABLE>
COMPETITION
The Bank competes with other thrift institutions, commercial banks, credit
unions and money market funds for both deposits and loans by offering
competitive rates, professional personal service and a wide variety of
products. The Bank also participates in regional and national automated teller
machine (ATM) networks to complement its ten offices in Cheshire, Hillsborough,
and Merrimack counties. The market area served by the Bank is competitive for
both deposits and loans due to the Bank's existence in and close proximity to
major markets of New Hampshire, including Concord, Manchester, Nashua and
Keene. The Bank estimates that it has approximately ten competitors in its
market areas.
<PAGE> 10
STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Bank is in a heavily regulated industry. As a New Hampshire chartered
guaranty (stock) savings bank whose deposits are insured by the FDIC, the Bank
is subject to regulation by federal and state regulatory authorities including,
but not limited to, the FDIC and the New Hampshire Commissioner of Banks.
The following table below sets forth the regulatory capital ratios of the Bank
at December 31, 1996, calculated in accordance with the capital requirements.
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------
(Dollars in Thousands)
Regulatory
Actual Required Excess Actual Percentage
Capital Capital Amount Percent Required
-------- -------- ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Leverage $ 28,486 16,922 11,564 6.73% 4.00%
Risk based:
(I) Tier 1 (core)<F1> $ 28,486 9,657 18,829 11.80% 4.00%
(ii) Total $ 31,063 19,315 11,748 12.87% 8.00%
<FN>
- -------------------
<F1> The Bank's Tier 1 (core) capital is less than its GAAP capital based upon
the regulatory requirement to deduct intangible assets from GAAP capital.
At December 31, 1996, the Bank had an intangible asset of $64,000, which
is the unamortized premium paid for the purchase of the deposits of a
failed bank from the FDIC in 1991. The premium is being amortized over
seven years.
</FN>
</TABLE>
The following are selected ratios for the Bank for the three year period ended
December 31, 1996:
<TABLE>
<CAPTION>
SELECTED RATIOS 1996 1995 1994
------ ------- -----
<S> <C> <C> <C>
Net income (loss) to:
Average assets .85% (.25)% .63%
Average stockholders' equity 13.39% (3.61)% 9.33%
Average stockholders' equity to average assets 6.34% 7.03% 6.74%
</TABLE>
<PAGE> 11
INTEREST RATE SENSITIVITY
The matching of assets and liabilities is analyzed by examining the extent to
which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income while a positive gap
would tend to adversely affect in net interest income. A sudden and significant
increase in interest rates may have an adverse impact on the ability of
borrowers of the Bank to repay their loans in accordance with the terms and may
also lengthen the period of time to dispose of other real estate owned.
Currently, pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), the FDIC is developing regulations that will include an
interest rate risk component into the calculation of capital ratios.
Interest rate risk management is conducted by the Bank as part of its
asset/liability and funds management process and is under the direction of an
Asset/Liability Management Committee (ALCO). The primary objective of the
Bank's asset/liability management process is to manage liquidity, maximize net
interest income and return on capital within acceptable levels or risks.
Interest rate risk is analyzed in terms of the projected impact on net income
from potential short and long term changes in interest rates. Interest rate
risk management also seeks to ensure liquidity and capital adequacy in various
rate scenarios relative to regulatory and internal guidelines.
The ALCO holds meetings on a regular basis to monitor and discuss the status
and results of asset/liability management strategies. It reviews various
interest rate risk measurement reports and compares simulated income exposures
to policy limits. It reviews the outlook for interest rates and the economy at
the global, national and local levels. It develops strategies to take into
account changes in economic conditions, new loan and deposit products, banking
regulations and fiscal monetary policy. The ALCO develops parameters for the
pricing and maturity distribution of deposits, loans and investments.
The Bank attempts to manage its exposure to interest rate risk primarily
through the sale of fixed rate mortgage loans. The designation of certain
investment securities as held for sale is also intended to provide the Bank
with greater flexibility in responding to changes in interest rates.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at
<PAGE> 12
December 31, 1996 which are anticipated by the Bank, based upon certain
assumptions, to reprice or mature in each of the future time periods shown.
Except as stated below, the amount of assets and liabilities shown which
reprice or mature during a particular period was determined in accordance
with the earlier of the term to repricing or the contractual term of the
asset or liability to maturity. Management has assumed no prepayments of the
Bank's fixed-rate loans. The assumptions used may not be indicative of future
withdrawals of deposits or prepayments of loans. Management uses its judgment
in classifying savings, NOW and Money Market accounts according to its
expectation of their respective sensitivities to market interest rate changes
based on local market conditions and historical experience.
<TABLE>
<CAPTION>
At December 31, 1996
-----------------------------------------------------------------------------------
(Dollars in Thousands)
6 Mos 6 Mos 1 yr to 2 yrs to 3 yrs to 5 yrs to Over
or less to 1 yr 2 yrs 3 yrs 5 yrs 10 yrs 10 yrs Total
---------- -------- ------- -------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net 53,781 48,249 8,773 12,084 12,240 8,568 14,298 157,993
Other loans, net 47,952 5,923 5,074 4,126 1,586 2,185 8,027 74,873
Investment securities held to maturity 9,711 54 57 97 2,339 46,740 645 59,643
Securities available for sale 34,463 12,485 1,000 -- 24,160 5,816 5,746 83,670
Mortgage-backed securities held to
maturity 4,600 3,600 4,637 -- 2,844 -- -- 15,681
FHLB stock 3,150 -- -- -- -- -- -- 3,150
-----------------------------------------------------------------------------------
Total interest-earning assets $ 153,657 70,311 19,541 16,307 43,169 63,309 28,716 395,010
Interest bearing liabilities
Savings accounts and advanced payment
by borrowers 27,081 -- -- -- -- -- 24,378 51,459
NOW accounts 6,144 -- 17,700 -- -- 17,700 -- 41,544
Money market accounts 25,915 -- -- -- -- -- -- 25,915
Certificate accounts 67,567 29,861 34,128 12,221 8,976 2,375 -- 155,128
Borrowings 73,470 3,241 15,214 -- -- -- -- 91,925
------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 200,177 33,102 67,042 12,221 8,976 20,075 24,378 365,971
Interest sensitivity gap per period (46,520) 37,209 (47,501) 4,086 34,193 43,234 4,338 29,039
-----------------------------------------------------------------------------------
Cumulative interest sensitivity gap (46,520) (9,311) (56,812) (52,726) (18,533) 24,701 29,039
------------------------------------------------------------------------------------
Cumulative interest sensitivity gap as a
percentage of total assets (10.9%) (2.2%) (13.3%) (12.3%) (4.3%) 5.8% 6.8% 6.8%
------------------------------------------------------------------------------------
Cumulative net interest earning assets
as a percentage of interest-bearing
liabilities 76.8% 96.0% 81.1% 83.1% 94.2% 107.2% 107.9% 107.9%
------------------------------------------------------------------------------------
</TABLE>
<PAGE> 13
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
Net interest income represents the difference between income on
interest-bearing assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The increase in net interest income for the year ended 1996 resulted from an
increase in interest-earning assets of $22.6 million. The Bank's average yield
on earning assets decreased from 7.68% in 1995 to 7.66% in 1996. The change in
the Bank's average rate paid on interest-bearing liabilities increased from
4.37% in 1995 to 4.49% for 1996.
Net interest income for 1996 amounted to $13.5 million and reflected an
increase of $308,000 over the previous year's level of $13.2 million. This
increase in net interest income is attributable to an increased level of
average interest-earning assets of $22.6 million while average interest-bearing
liabilities increased $25.2 million for the same period. Net interest income
and net interest margin were negatively affected during 1996 primarily due to
an increase in prepayments of mortgage-backed securities and government
guaranteed loans. This resulted in a decrease in net interest margin from 3.72%
in 1995 to 3.57% in 1996.
The increase in net interest income for the year ended 1995 continued to be
driven by higher interest-earning assets in 1995. The Bank's average yield on
earning assets increased from 6.98% in 1994 to 7.68% in 1995. The change in the
Bank's average rate paid on interest-bearing liabilities increased from 3.57%
in 1994 to 4.37% in 1995.
Net interest income for 1995 amounted to $13.2 million and reflected an
increase of more than $949,000 over the previous year's level of $12.2 million.
This increase in net interest income is attributable to an increased level of
average interest-earning assets of $21.6 million while average interest-bearing
liabilities increased only $13.4 million for the same period. This resulted in
an increase in net interest margin from 3.67% in 1994 to 3.72% in 1995.
<PAGE> 14
The following table sets forth certain information relating to the Bank's
consolidated balance sheets and consolidated statements of operations for the
years ended December 1996, 1995 and 1994, and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances
are derived from average daily balances. Average balances and yields include
non-accrual loans.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
(Dollars in Thousands)
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Cost Balance Paid Cost Balance Paid Cost
--------- -------- ------- --------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average assets
Interest-earning assets:
Mortgage loans, net <F1> $ 147,015 $ 12,373 8.42% $ 140,096 $ 11,827 8.44% $ 153,436 $ 11,389 7.42%
Other loans, net <F1> 81,904 7,429 9.07% 84,362 7,693 9.12% 65,956 5,633 8.54%
Investment securities and securities
available for sale 127,333 7,898 6.20% 88,145 4,862 5.52% 80,279 4,157 5.18%
Mortgage backed securities 15,753 878 5.57% 34,976 2,392 6.84% 25,533 1,596 6.25%
FHLB stock 3,320 212 6.39% 4,254 295 6.93% 3,865 300 7.76%
Federal funds and interest bearing
deposits 1,755 90 5.13% 2,636 147 5.58% 3,843 164 4.27%
---------------------------------------------------------------------------------------
Total interest-earning assets 377,080 28,880 7.66% 354,469 27,216 7.68% 332,912 23,239 6.98%
---------------- ---------------- ----------------
Non-interest earning assets 25,923 20,541 23,963
--------- --------- ---------
Total average assets $ 403,003 $ 375,010 $ 356,875
========= ========= =========
Average liabilities:
Interest bearing liabilities
Savings accounts $ 52,231 1,288 2.47% $ 57,887 1,545 2.67% $ 66,450 1,782 2.68%
Money Market & NOW accounts 65,284 1,234 1.89% 70,936 1,531 2.16% 80,279 1,790 2.23%
Certificate accounts 154,476 8,841 5.72% 134,335 7,554 5.62% 99,581 4,688 4.71%
Borrowings 74,781 4,038 5.40% 58,413 3,415 5.85% 61,898 2,757 4.45%
---------------------------------------------------------------------------------------
Total interest bearing
liabilities 346,772 15,401 4.44% 321,571 14,045 4.37% 308,208 11,017 3.57%
---------------- ---------------- ----------------
Non-interest bearing liabilities 30,674 27,060 24,607
--------- --------- ---------
Total average liabilities 377,446 348,631 332,815
Shareholder's Equity/Retained Earnings 25,557 26,379 24,060
---------- --------- ---------
Total average liabilities and retained
earnings $ 403,003 $ 375,010 $ 356,875
========= ========= =========
Net interest income/interest rate
spread<F2> $ 13,479 3.22% $ 13,171 3.31% $ 12,222 3.41%
================ ================ ================
Net interest-earning assets/net
interest margin<F3> $ 30,308 3.57% $ 32,898 3.72% $ 24,704 3.67%
========= ================= ================= =====
Interest-earning assets to
interest-bearing liabilities 108.74% 110.23% 108.02%
========== ========== ==========
<FN>
- -------------------
<F1> Includes non-accrual loans.
<F2> Interest rate spread represents the difference between the average rate
on interest-earning assets and the average cost of interest-bearing
liabilities
<F3> Net interest margin represents net interest income before the provision
for possible loan losses divided by average interest-earning assets.
</FN>
</TABLE>
<PAGE> 15
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume, and (iii) the net change (change
in rate multiplied by change in volume). The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to Compared to
Year Ended December 31, 1995 Year Ended December 31, 1994
---------------------------- -----------------------------
(Dollars in Thousands)
Increase (Decrease) Increase (Decrease)
In Net Interest Income In Net Interest Income
---------------------------- -----------------------------
Due to Due to
Volume Rate Net Volume Rate Net
-------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net $ 574 $ (28) $ 546 $ (1,043) $ 1,481 $ 438
Other loans, net (222) (42) (264) 1,712 348 2,060
Investment securities and securities available for sale 2,377 659 3,036 482 223 705
Mortgage backed securities (1,132) (382) (1,514) 664 132 796
FHLB stock (61) (22) (83) 80 (85) (5)
Federal funds and interest bearing deposits (46) (11) (57) (733) 716 (17)
-------------------------------------------------------------
Net change in income on interest-earning assets $ 1,490 $ 174 $ 1,664 $ 1,162 $ 2,815 $ 3,977
Interest-bearing liabilities:
Savings accounts $ (145) $ (112) $ (257) $ (230) $ (7) $ (237)
Money market & NOW accounts (116) (181) (297) (201) (58) (259)
Certificate accounts 1,150 137 1,287 2,360 506 2,866
Borrowed funds 901 (278) 623 (163) 821 658
-------------------------------------------------------------
Net change in expense on interest-bearing liabilities 1,790 (434) 1,356 1,766 1,262 3,028
-------------------------------------------------------------
Net change in interest income $ (300) $ 608 $ 308 (604) $ 1,553 $ 949
=============================================================
</TABLE>
COMPARISON OF RATE VOLUME FOR 1996 AND 1995
For the year ended December 31, 1996, interest income increased by $1.7 million
compared to the same period in 1995. Interest expense increased by $1.4
million, while net interest income increased by $308,000 for this same period.
The increase in interest income is the result of increased volume by $1.5
million, and increased rates by $174,000, from 1995. Mortgage loan volume
increased by $574,000 while other loans had volume decreases of $222,000.
Investments increased due to volume and rate of $1.1 million and $244,000,
respectively. Volume increases in investments were the direct result of the
Bank funding these purchases with FHLB borrowings. The increase in interest
expense is attributable to higher volumes of $1.8 million which were partially
offset by lower rates of $434,000.
<PAGE> 16
Certificate of deposit account volume increased by $1.2 million and rates
increased by $137,000 with the growth occurring primarily in shorter term
certificate of deposit accounts. Borrowing volume increased by $901,000, which
was partially offset by rate decreases of $278,000. Savings accounts decreased
due to volume and rate of $145,000 and $112,000, respectively while money
market and NOW's decreased due to volume and rate of $116,000 and $181,000,
respectively.
Net interest income increased due to rate by $608,000, which was offset by
volume declines of $300,000. Interest- earning assets increased by $22.6
million while interest-bearing liabilities increased by $25.2 million, during
1996.
COMPARISON OF RATE/VOLUME FOR 1995 AND 1994
For the year ended December 31, 1995, interest income increased by $4.0 million
compared to the same period in 1994. Interest expense as well as net interest
income increased by $3.0 million and $949,000, respectively, for this same
period.
The increase in interest-earning assets was attributed to higher levels of
interest income in the investment and loan portfolio of $2.5 million and $1.5
million, respectively. The mortgage loan portfolio experienced a $1.0 million
decrease due to a $24.0 million loan sale in the third quarter of 1994, while
other loans increased by $1.7 million as the bank purchased approximately $7.9
million of government guaranteed loans for this period as well as shifted the
mix of lending toward commercial loans. Rising interest rates attributed to an
increase in the investment and loan portfolio of $1.0 million and $1.8 million,
respectively. The increase in interest expense is attributable to higher volume
and rates of $1.8 million and $1.2 million, respectively. Certificate of
deposit accounts experienced a volume increase of $2.4 million with the growth
being experienced in shorter term certificate of deposit accounts. Rate
increases of $821,000 and $506,000 were experienced in borrowings as well as
certificate of deposit accounts which were a direct result of the higher
interest rate environment for 1995.
Net interest income increased due to rate by $1.6 million which was offset by
volume declines of $604,000. Interest-earning assets increased by $21.6 million
while interest-bearing liabilities increased by $13.4 million during 1995.
<PAGE> 17
ITEM 2. Properties
The Bank conducts its business through nine banking offices. The bank also
operates ATMs at each branch location, and it operates a remote ATM facility in
Dublin, Greenfield, Hillsborough and Peterborough, NH.
<TABLE>
<CAPTION>
Date Lease
Leased or Expiration
Location Leased/Owned Acquired Date<F1>
-------- ------------ --------- ----------
<S> <C> <C> <C>
Main Office <F2> Owned 1966 --
35 Main Street
Peterborough
Peterborough Plaza Leased 1973 2003
Route 101
Peterborough
Route 9 Owned 1989 --
Hillsborough
Lorden Plaza Leased 1990 2009
Milford
Lancotot's Shopping Center Owned 1995 --
Route 114
Weare
Route 202 South Owned 1983 --
Jaffrey
Main Street Owned 1986 --
Antrim
Loudon Road Leased 1988 2008
Concord
66 No. Main Street Leased 1995 2015
Concord
Pennichuck Square Leased 1996 2011
Merrimack
<FN>
- -------------------
<F1> represents final renewal expiration dates
<F2> The Bank receives rental income under certain lease agreements with third
parties.
</FN>
</TABLE>
ITEM 3. Legal Proceedings
There are no material legal proceedings to which the Bank is a party or to
which any of its property is subject, although the Bank is a party to ordinary
routine litigation incidental to its business.
<PAGE> 18
ITEM 4. Security Ownership of certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference to
the section captioned "Beneficial Ownership of Securities" of the Proxy
Statement for the Annual Meeting of Shareholders to be held on May 28, 1997
(the "Proxy Statement").
PART II
ITEM 5. Market for the Bank's Common Stock and Related Security Holder Matters
Stock Market Data
The Bank's common stock is traded over-the-counter on the NASDAQ National Small
Capitalization Market under the symbol "PETE". The stock is listed in the Wall
Street Journal as "PRIMARYBK" and in the local papers in the Bank's market area
as "Primary Bank".
The high and low bid prices for the stock at the conclusion of each quarter as
provided by the National Association of Securities Dealers, Inc. are as
follows:
<TABLE>
<CAPTION>
Quarter Ended High Bid: Low Bid:
------------------- --------- --------
<S> <C> <C>
March 31, 1995 11 3/4 9 3/4
June 30, 1995 14 1/2 10 1/2
September 30, 1995 15 3/4 13 1/2
December 31, 1995 15 1/2 12
March 31, 1996 13 11 1/2
June 30, 1996 13 1/4 12
September 30, 1996 13 1/4 11 3/4
December 31, 1996 16 12 1/4
</TABLE>
The Bank has not paid any cash dividends since its conversion from mutual to
stock form in October 1993. The declaration of cash dividends is dependent upon
a number of factors including regulatory limitations, surplus requirements, and
the Bank's operating results and financial condition.
As of February 28, 1997, the Bank had approximately 663 shareholders of record
and 2,087,342 outstanding shares of Common Stock. The number of shareholders of
record does not reflect the number of persons or entities who hold their Common
Stock in nominee or "Street" name through various brokerage firms.
ITEM 6. Selected Financial Data
The information required by this Item is incorporated herein by reference to
the table captioned "Selected Financial Data" of the Primary Bank 1996 Annual
Report to Shareholders (the "Annual Report").
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this Item is incorporated herein by reference to
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Bank's Annual Report.
For additional information, please see Item 1.
<PAGE> 19
ITEM 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated herein by reference to
the financial statements and supplementary data which appears on pages 17
through 41 of the Bank's Annual Report.
Independent Auditor's Report Page 17
Balance Sheets Page 18
Statements of Operations Page 19
Statements of Changes in Stockholders' Equity Page 20
Statements of Cash Flows Pages 21 to 22
Notes to Financial Statements Pages 23 to 41
PART III
ITEM 9. Directors and Principal Officers of the Bank
Directors
Information regarding the Directors of the Bank required by this Item is
incorporated herein by reference to the section captioned "Election of
Directors" of the Proxy Statement.
Principal Officers of the Bank
Information regarding the Executive Officers of the Bank required by this Item
is incorporated herein by reference to the section captioned "Executive
Officers" of the Proxy Statement.
ITEM 10. Management Compensation and Transactions
The information required by this Item is incorporated herein by reference to
the sections captioned "Directors Compensation", "Executive Compensation",
"Compensation Committee Report on Executive Compensation", and
"Transactions With Certain Related Persons" of the Proxy Statement.
PART IV
ITEM 11. Exhibits, Financial Statement Schedules and Reports on Form F-3
(a) Contents:
(1) Financial Statements: The audited financial statements of the Bank
and the notes thereto, contained in the Bank's Annual Report to
Shareholders for the year ended December 31, 1996.
(2) Financial Statement Schedules: Schedules I, II, III, IV, and VI are
omitted because the required information is contained in or may be
readily determined from either Item 1 or the audited financial
statements or notes thereto incorporated by reference into Item 8
of this Report. Schedule V is omitted because it is not applicable.
(3) Exhibits required by Item 11(c): Primary Bank's amended By-laws are
being filed with this Report. In addition, the Bank is furnishing
its Annual Report to Shareholders for the year ended December 31,
1996. To the extent that portions of the Annual Report are not
specifically incorporated by reference herein, they are furnished
only for the information of the FDIC and are not deemed to be filed
herewith.
<PAGE> 20
(b) Reports on Form F-3: None filed during the fourth quarter of 1996.
(c) Exhibits
(1) ARTICLES OF INCORPORATION AND BY-LAWS
(a) Amended and restated Articles of Agreement of Primary Bank
filed as Exhibit 1 to the Bank's Registration Statement on
Form F-1 filed with the FDIC effective October 13, 1993.
(b) Amended By-laws of Primary Bank are included with this Annual
Report on Form F-2.
(2) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
(a) Amended and restated Articles of Agreement of Primary Bank
filed as Exhibit 1 to the Bank's Registration Statement on
Form F-1 filed with the FDIC effective October 13, 1993.
(b) Amended By-laws of Primary Bank are included with this Annual
Report on Form F-2.
(c) The Bank's specimen certificate for shares of Common Stock
filed as Exhibit 2 to the Bank's Registration Statement on
Form F-1 filed with the FDIC effective October 13, 1993.
(3) MATERIAL CONTRACTS
(a) Primary Bank's (formerly Peterborough Savings Bank's) 1993
Incentive Stock Option Plan filed as Exhibit A to the Proxy
Statement for the Annual Meeting of Shareholders held on
April 28, 1994.
(b) Employment Agreement of Christopher J. Flynn filed as Exhibit
7 to the Bank's Registration Statement on Form F-1 filed with
the FDIC effective October 13, 1993.
(c) Special Termination Agreements of Charles P. Monaghan and
Elizabeth M. Rank filed as Exhibit 7 to the Bank's
Registration Statement on Form F-1 filed with the FDIC
effective October 13, 1993.
(d) Primary Bank's (formerly Peterborough Savings Bank's) 1993
Stock Option Plan for Outside Directors filed as Exhibit B to
the Proxy Statement for the Annual Meeting of Shareholders
held on April 28, 1994.
(e) Primary Bank's (formerly Peterborough Savings Bank's)
Recognition and Retention Plan for Officers and Employees
filed as Exhibit C to the Proxy Statement for the Annual
Meeting of Shareholders held on April 28, 1994.
(f) Primary Bank's (formerly Peterborough Savings Bank's)
Recognition and Retention Plan for Outside Directors filed as
Exhibit D to the Proxy Statement for the Annual Meeting of
Shareholders held on April 28, 1994.
(g) The Amendment of Primary Bank's 1993 Stock Option Plan for
Outside Directors as presented in the Proxy Statement for the
Annual Meeting of Shareholders held on September 28, 1995.
(h) Primary Bank's 1995 Stock Option Plan for Officers and
Employees filed as Exhibit A to the Proxy Statement for the
Annual Meeting of Shareholders held on September 28, 1995.
(i) Primary Bank's 1995 Stock Option Plan for Outside Directors
filed as Exhibit B to the Proxy Statement for the Annual
Meeting of Shareholders held on September 28, 1995.
<PAGE> 21
(j) Employment Agreements for Bruce D. Clow, Michael J. Janosco,
Jr., Charles P. Monaghan, and Elizabeth M. Rank filed as
Exhibits C,D,E and F, respectively, to the Banks Form F-2
filed with the FDIC for the fiscal year ended December 31,
1995.
(4) STATEMENT REGARDING CONPUTATION OF PER SHARE EARNINGS
The computation of earnings per share can be readily determined
from the material contained in and incorporated by this Annual Report on
Form F-2.
(5) STATEMENT REGARDING COMPUTATION OF RATIOS
As the Bank does not have any debt securities registered under
Section 12 of the Securities Exchange Act of 1993 as amended, no ratio of
earnings to fixed charges appears in this Annual Report on Form F-2.
(6) ANNUAL REPORT TO SECURITY HOLDERS
Except to the extent expressly incorporated herein, the Primary
Bank 1996 Annual Report to Shareholders is furnished only for the
information of the FDIC and is not deemed to be filed herewith.
(7) LETTER REGARDING CHANGE IN ACCOUNTING PRINCIPLES
None.
(8) PREVIOUSLY UNFILED DOCUMENTS
None.
(9) SUBSIDIARY OF THE BANK
None
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Bank has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE 03/27/97 PRIMARY BANK
By: /s/ Christopher J. Flynn
Christopher J. Flynn, President and
Chief Executive Officer
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 Bank and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- --------
<S> <C> <C>
By: /s/ Christopher J. Flynn President and Chief Executive 03/25/97
Officer and Director (Principal
Executive Officer)
By: /s/ Michael J. Janosco, Jr. Senior Vice President and Chief 03/27/97
Financial Officer (Principal
Financial Officer)
By: /s/ William M. Pierce, Jr. Vice President and Controller 03/27/97
(Principal Accounting Officer)
By: /s/ Robert D. Weathers Chairman of the Board 03/27/97
By: /s/ Charles W. Wagner Director 03/27/97
By: /s/ David J. Houston Director 03/27/97
By: /s/ Forrest D. McKerley Director 03/27/97
By: /s/ Charles F. Whittemore Director 03/27/97
By: /s/ David A. Jordan Director 03/27/97
By: /s/ Richard R. Fernald Director 03/27/97
By: /s/ Richard E. Amidon Director 03/27/97
By: /s/ Daniel E. Church Director 03/27/97
By: /s/ Katharine A. Eneguess Director 03/27/97
By: /s/ Thomas D. Rath Director 03/27/97
By: /s/ Peter C. Read Director 03/27/97
By: /s/ Dwight D. Sowerby Director 03/27/97
</TABLE>
<PAGE> 23
PRIMARY BANK ANNUAL REPORT 1996
Selected Financial Data
<TABLE>
<CAPTION>
Balance Sheet Data At December 31
- ---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except per Share Data)
<S> <C> <C> <C> <C> <C>
Total assets $427,407 $382,310 $357,470 $333,747 $328,219
Investment securities 158,363 118,424 112,500 89,232 79,688
Total loans, net 232,960 229,901 210,925 212,508 212,756
Allowance for loan losses 2,577 3,447 2,850 2,946 3,206
Other real estate owned, net 1,980 2,088 4,455 5,340 7,224
Deposits 305,090 303,632 279,736 255,614 291,744
Borrowings 91,925 51,540 52,056 53,260 21,114
Stockholders' Equity
(Retained Earnings) 28,133 24,966 22,995 23,032 13,405
Operating Data
- ---------------------------------------------------------------------------------------------------
Interest and dividend income $ 28,880 $ 27,216 $ 23,239 $ 20,757 $ 23,916
Interest expense 15,401 14,045 11,017 10,744 14,304
--------------------------------------------------------
Net interest and dividend income before
provision for loan losses 13,479 13,171 12,222 10,013 9,612
Provision for loan losses 722 2,602 432 1,188 2,523
--------------------------------------------------------
Net interest and dividend income after
provision for loan losses 12,757 10,569 11,790 8,825 7,089
Non-interest income 2,550 2,526 2,237 2,825 3,707
Operating expense 12,126 14,283 12,471 11,158 13,764
--------------------------------------------------------
Income (loss) before income taxes 3,181 (1,188) 1,556 492 (2,968)
Income tax expense (benefit) (240) (235) (690) (435) -
--------------------------------------------------------
Net income (loss) $ 3,421 $ (953) $ 2,246 $ 927 $ (2,968)
========================================================
Earnings (loss) per common and
common equivalent share $ 1.59 $ (.46) $ 1.10 N/A<F*> N/A<F*>
========================================================
- --------------------
<FN>
<F*> Per share information is not reported as the Bank was not a public
company until October 13, 1993.
</FN>
</TABLE>
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the financial
statements and related notes included in this report.
Net income for Primary Bank (the "Bank") depends largely upon net interest
and dividend income, which is the difference between interest and dividend
income from loans and investments ("interest-earning assets") and interest
expense on deposits and borrowed funds ("interest-bearing liabilities").
Net income is affected by general economic conditions, policies established
by regulatory authorities and competition.
FINANCIAL CONDITION
Total assets of the Bank increased by $45.1 million from $382.3 million at
December 31, 1995 to $427.4 million at December 31, 1996. This increase is
primarily attributable to an increase in the Bank's investment portfolio,
including investment securities held to maturity and available for sale.
INVESTMENT SECURITIES
During 1996, the average balance at cost, of the investment portfolio was
$143.1 million compared to $123.1 million in 1995. The increase occurred as
a result of a change in asset mix due to the sale of $16.2 million of
government guaranteed loans which were sold in order to reduce prepayment
risk as well as asset/liability repositioning. The yield on the portfolio
for 1996 was 6.13% compared to 5.89% in 1995. At December 31, 1996, the
portfolio at cost was $159.0 million compared to $118.2 million at December
31, 1995. At December 31, 1996, the securities available for sale portfolio
had a net unrealized loss excluding tax effects of $631,000 compared to a
$228,000 net unrealized gain in 1995.
LOANS
During 1996, the average balance of the loan portfolio was $228.9 million
compared to $224.5 million in 1995. The yield on the loan portfolio for
1996 was 8.65% compared to 8.70% in 1995.
The Bank's loan portfolio increased by $2.2 million or 0.9%, during 1996,
from $233.3 million at December 31, 1995 to $235.5 million at December 31,
1996. The principal reason for the increase was the Bank's continued
emphasis during 1996 on business lending. This strategy was responsible
for a $12.8 million increase in commercial loans which was partially offset
by a net reduction of $5.7 million of loans in the government guaranteed
purchased loan portfolio which were sold in order to reduce prepayment risk.
The increase in commercial loans was somewhat offset by a $6.4 million
decrease in residential lending, including home equity and second mortgage
loans.
ASSET DISPOSITION PLAN
On November 29, 1995 the Bank announced its plan for the accelerated
disposition of a large portion of its substandard real estate related
assets, including marginally performing and non-performing loans and other
real estate owned. As a result in 1995, the Bank took a special charge of
$3.3 million or $1.61 per share to facilitate the disposition of problem
assets.
NON-PERFORMING ASSETS
During the three years from 1994 to 1996, the Bank has made significant
progress in reducing the level of non-performing loans and non-performing
assets. This was accomplished through an aggressive collection program, an
aggressive program of selling foreclosed property, including attractive
financing programs, and the inherent benefits of a gradually improving
economic environment.
<PAGE> 12
Total non-performing loans decreased by $3.8 million from $5.9 million or
2.53% of total gross loans at December 31, 1995 to $2.1 million or .88% of
total gross loans at December 31, 1996. Total non-performing assets
decreased by $4.0 million from $8.0 million or 2.09% of total assets at
December 31, 1995 to $4.0 million or .95% of total assets at December 31,
1996.
The following table represents information regarding non-performing loans
and assets.
<TABLE>
<CAPTION>
At December 31
- ------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual mortgage loans $1,873 $5,259 $3,845
Non-accrual other loans 191 650 498
----------------------------
Total non-performing loans 2,064 5,909 4,343
----------------------------
Real estate held for investment - - 860
Foreclosed real estate, net 1,980 2,088 4,455
----------------------------
Total non-performing assets $4,044 $7,997 $9,658
============================
Non-performing loans to total gross loans .88% 2.53% 2.03%
Non-performing assets to total assets .95% 2.09% 2.70%
</TABLE>
DEPOSITS
Deposits generated from within the Bank's local market area are the primary
source of funds for the Bank's lending and investment operations. The Bank
offers its customers a tiered deposit program and prices its products
competitively within its market area. In addition to savings deposits, NOW
and money market deposits, the Bank offers several consumer and business
checking account programs to meet the individual needs of its customers.
Substantially all of the Bank's deposits are derived from customers who work
or reside in the Bank's market area.
Deposit levels remained largely flat in 1996 increasing $1.5 million from
$303.6 million at year end 1995 to $305.1 million at year end 1996. Average
deposits, however, increased $12.4 million to $302.7 million at year end
1996. Average term accounts, demand deposits, and NOW accounts increased by
$20.1 million, $3.6 million, and $2.6 million respectively. Savings and
money market accounts decreased by $5.7 million and $8.2 million
respectively.
BORROWINGS AND CUSTOMER REPURCHASE AGREEMENTS
Although deposits are the Bank's primary source of funds, the Bank utilizes
borrowings from the Federal Home Loan Bank of Boston ("FHLB of Boston") as
an alternative funding source when appropriate. At December 31, 1996 the
Bank had FHLB of Boston borrowings of $58.5 million up from $27.8 million at
December 31, 1995. This increase in funding was used to purchase investment
securities.
Another source of funding used by the Bank are customer repurchase
agreements, a highly successful cash management product. During 1996 these
accounts increased $9.7 million or 41% to $33.4 million at December 31, 1996
from $23.8 million at December 31, 1995.
<PAGE> 13
RESULTS OF OPERATIONS:
COMPARISON OF YEARS ENDED IN DECEMBER 31, 1996 AND DECEMBER 31, 1995
- --------------------------------------------------------------------
GENERAL
The Bank recorded net income for the year ended December 31, 1996 of $3.4
million compared with a net loss of $953,000 for the year ended December 31,
1995. The primary reasons attributable to the increase were related to the
reductions in non-performing assets from $8.0 million at year end 1995 to
$4.0 million at year end 1996, as well as the special charge taken in 1995
of $3.3 million to facilitate the disposition of problem assets. Trends in
the real estate market, locally and in New England, impact the Bank's
collection of its real estate loan portfolio. Although management believes
the current allowance for loan losses is adequate, if the local and New
England real estate markets show signs of weakness, additional provisions
for loan losses may be necessary in the future.
The Bank's operating results depend largely upon its net interest margin
which is the difference between the average yield on loans and investments,
and the average interest rate paid on deposits and borrowings. The net
interest margin is affected by economic and market factors which influence
interest rates, loan demand and deposit flows. The net interest margin
decreased to 3.57% for the year ended December 31, 1996, from 3.72% for the
year ended December 31, 1995 and 3.67% for the year ended December 31, 1994.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $1.7 million or 6.1% for the year
ended December 31, 1996 when compared to the year ended December 31, 1995.
These results include the negative cost impact of $230,000, taken in the
accelerated paydown of GNMA mortgage-backed securities previously purchased
at a premium. Interest on loans increased $282,000 as a result of an
increase in the average balance outstanding of $4.5 million, although the
interest increase was offset by a decrease in the average rate earned on the
portfolio from 8.70% in 1995 to 8.65% in 1996. Interest and dividend income
on investment securities and short-term investments increased by $1.4
million or 18% in 1996, as a result of the increase in the average balance
outstanding of $18.2 million over 1995 levels and an increase in the yield
on investment securities to 6.13% for the December 31, 1996 period, as
compared to 5.92% for December 31, 1995.
INTEREST EXPENSE
Total interest expense increased $1.4 million to $15.4 million for the year
ended December 31, 1996 from $14.0 million for the year ended December 31,
1995. Interest expense from deposits increased by $733,000 or 6.9% from
1995 to 1996. This is due to an increase in average deposits of $8.8
million as well as an increase in average cost of funds to 4.18% for 1996 as
compared to 4.04% for 1995. Interest expense from borrowed funds increased
$623,000 or 18.2% during this period. Interest expense on borrowed funds
includes interest paid on customer repurchase agreements and FHLB of Boston
borrowings. Interest paid on customer repurchase agreements and FHLB of
Boston borrowings increased $226,000 and $397,000, respectively to $1.3
million and $2.8 million for 1996. This increase is the result of higher
average balances from customer repurchase agreements and FHLB of Boston
borrowings of $6.4 million and $10.0 million, respectively, which were
partially offset by lower funding costs in 1996.
PROVISION FOR LOANS LOSSES
The provision for loan losses charged to earnings totaled $722,000 and $2.6
million for the years ended December 31, 1996 and 1995, respectively. This
decrease was the result, in part, of a 1995 fourth quarter special charge of
$1.7 million in order for the Bank to pursue its accelerated asset
disposition plan.
NON-INTEREST INCOME
Non-interest income increased $24,000 to $2.6 million for the year ended
December 31, 1996 compared to the 1995 period. The increase is primarily
attributable to deposit account fees which increased by $371,000 or 25.2%
during 1996 to $1.8 million.
The Bank had non-recurring income in 1996 of $137,000 related to investment
security and government guaranteed loan sales. In 1995 the Bank's non-
recurring income amounted to $488,000, which was primarily related to a gain
recorded on the sale of mortgage servicing rights.
<PAGE> 14
OPERATING EXPENSES
Operating expenses decreased 15.1% to $12.1 million for the year ended
December 31, 1996 from $14.3 million for 1995. This decrease was primarily
related to merger expenses of $736,000 related to the acquisition of Horizon
Bank and Trust incurred in 1995 as well as a $1.6 million special charge in
1995 to facilitate the disposition of foreclosed properties. Salaries and
benefits increased by $261,000 or 4.9% from $5.3 million for 1995 to $5.6
million in 1996 due primarily to an increase in the level of staffing which
was offset by an increase in deferred origination costs related to increased
loan production for 1996. Office occupancy expenses increased $101,000 or
8.8% during this period to $1.3 million due to the additions of a second
branch in Concord in the third quarter of 1995, a branch in Merrimack
expected to open in the first quarter of 1997 as well as a reduction in
rental income for 1996. Office expenses increased $187,000 or 17.8% during
this period to $1.2 million due to an increased cost in supplies and
postage, telephone, and depreciation expense. FDIC insurance premiums
decreased by $356,000 during the period to $45,000 due to assessment rate
reductions experienced retroactive to June 1995. Data processing expenses
increased by $528,000 from $685,000 in 1995 to $1.2 million in 1996 as the
Bank converted its data processing center to a service bureau during the
fourth quarter of 1995. Other expenses decreased by $2.2 million to $1.3
million in 1996 due to the special charge taken of $1.6 million related to
foreclosed properties in 1995 as well as the continued reduction of OREO and
non-performing loans in 1996 which enabled the Bank to reduce the OREO
reserve by $484,000 and subsequently increase the allowance for loan losses.
FEDERAL INCOME TAX BENEFIT
As a result of operating loss carry-forwards the Bank did not pay Federal
income taxes in 1996 or 1995. During 1996 and 1995, the Bank recorded
$240,000 and $235,000 respectively, of Federal income tax benefits as a
result of decreasing the deferred tax asset valuation reserve based on
favorable future earnings expectations.
LIQUIDITY AND CAPITAL RESOURCES
The Bank must maintain a significant amount of cash and assets which can
readily be converted into cash in order to meet cash outflows from normal
depositor requirements and loan demands. The Bank's primary sources of
funds are deposits, loan amortization and prepayments, sales or maturities
of securities, borrowings and income on earning assets. In addition the
Bank maintains assets invested in Federal funds sold and interest bearing
deposits, which can be immediately converted into cash, and Government
Agency securities which can be sold or pledged to raise funds.
RESULTS OF OPERATIONS:
COMPARISON OF YEARS ENDED IN DECEMBER 31, 1995 AND DECEMBER 31, 1994
- --------------------------------------------------------------------
GENERAL
The Bank recorded a net loss for the year ended December 31, 1995 of
$953,000 compared with net income of $2.2 million for the year ended
December 31, 1994. The principal reason for the decrease was a $3.3 million
special charge to facilitate the disposition of problem assets.
The Bank's operating results depend largely upon its net interest margin
which is the difference between the average yield on loans and investments,
and the average interest rate paid on deposits and borrowings. The net
interest margin is affected by economic and market factors which influence
interest rates, loan demand and deposit flows. The net interest margin
spread increased to 3.72% for the year ended December 31, 1995, from 3.67%
for the year ended December 31, 1994. Trends in the real estate market
locally and in New England impact the Bank because of its real estate loan
portfolio.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $4.0 million or 17.1% for the year
ended December 31, 1995 when compared to the year ended December 31, 1994.
Interest on loans increased $2.5 million or 14.7% as a result of an increase
in the average balance outstanding of $5.1 million, an increase in the
average rate earned on the portfolio from 7.76% in 1994 to 8.70% in 1995.
Interest and dividends on investment securities and short-term investments
increased by $1.5 million or 23.8% in 1995 as a result of the increase in
the average balance outstanding of $16.5 million over 1994 levels, and an
increase in the yield on investment securities to 5.92% for the December 31,
1995 period, as compared to 5.48% for December 31, 1994.
<PAGE> 15
INTEREST EXPENSE
Total interest expense increased $3.0 million to $14.0 million for the year
ended December 31, 1995 from $11.0 million for the year ended December 31,
1994. Interest expense from deposits increased by $ 2.4 million or 28.7%
from 1994 to 1995. This is due to an increase in average deposits of $16.8
million as well as an increase in average cost of funds to 4.04% for 1995 as
compared to 3.35% for 1994. Interest expense from borrowed funds increased
$658,000 or 23.9% during this period. Interest expense on borrowed funds
includes interest paid on customer repurchase agreements and FHLB of Boston
borrowings. Interest paid on customer repurchase agreements increased
$706,000 from $351,000 in 1994 to $1.1 million in 1995 primarily as a
result of a 38.6% increase in customer repurchase agreement balances at
December 31, 1995 of $23.8 million. Interest on FHLB of Boston borrowings
decreased $48,000 from 1994 as a result of lower borrowings throughout the
year.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to earnings amounted to $2.6 million
and $432,000 for the years ended December 31, 1995 and 1994 respectively.
This increase was, in large part, the result of a fourth quarter special
charge of $1.7 million in order for the Bank to pursue its accelerated asset
disposition plan.
NON-INTEREST INCOME
Non-interest income increased $289,000 to $2.5 million for the year ended
December 31, 1995 compared to the 1994 period. The increase was mainly the
result of a 1995 gain on the sale of mortgage servicing rights of $432,000.
In 1994 the Bank recorded a gain on the sale of mortgage loans of $357,000
partially offset by a net loss of $322,000 on the sales of securities.
OPERATING EXPENSE
Total operating expense increased 14.5% to $14.3 million for the year ended
December 31, 1995, from $12.5 million for 1994. Salaries and benefits
increased by 436,000 or 8.9% from $4.9 million for 1994 to $5.3 million in
1995 due primarily to temporary employees and overtime needed to complete
the merger with Horizon, the relocation of the finance and operations
personnel to the new operations center and the conversion to a new data
processor. The Bank also opened a new branch on Main Street, Concord, New
Hampshire. OREO expenses increased $1.5 million from $655,000 in 1994 to
$2.1 million. The increase was due to the special charge of $1.6 million to
facilitate the disposition of the foreclosed properties. All other expenses
decreased by $102,000 from $6.9 million in 1994 to $6.8 million in 1995.
Included in this decrease was FDIC insurance premiums which decreased
$335,000 as a result of the lower premiums for the second half of 1995.
FEDERAL INCOME TAX BENEFIT
As a result of operating loss carry-forwards the Bank did not pay Federal
income taxes in 1995 or 1994. During 1995 and 1994, the Bank recorded
$235,000 and $690,000 respectively, of Federal income tax benefits as a
result of decreasing the deferred tax asset valuation reserve due to
enhanced anticipated future earnings.
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
PRIMARY BANK:
We have audited the accompanying balance sheets of Primary Bank as of
December 31, 1996 and 1995, and the related statements of operations,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are
the responsibility of the Bank's management. 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 financial position of Primary Bank at December
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 23, 1997
<PAGE> 17
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
- ----------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------
ASSETS (Dollars in Thousands, Except Per Share Data)
<S> <C> <C>
Cash and cash equivalents (note 2) $ 12,430 $ 11,040
Securities available for sale (cost: $83,670 in 1996
and $70,040 in 1995) (notes 3 and 14) 83,039 70,268
Investment securities held to maturity (fair value:
$59,259 in 1996 and $32,966 in 1995) (notes 4,
13 and 14) 59,643 32,790
Mortgage-backed securities held to maturity (fair value:
$15,461 in 1996 and $15,132 in 1995) (notes 5 and 14) 15,681 15,366
Loans (notes 6, 7 and 14) 235,537 233,348
Less allowance for loan losses (note 7) (2,577) (3,447)
-----------------------
NET LOANS 232,960 229,901
-----------------------
Banking premises and equipment, net (note 9) 8,815 9,117
Other real estate owned, net (note 10) 1,980 2,088
Accrued interest receivable 3,355 2,945
Stock in FHLB of Boston, at cost (note 11) 3,150 4,343
Other assets 4,313 3,092
Deferred income tax asset, net (note 15) 2,041 1,360
-----------------------
TOTAL ASSETS $427,407 $382,310
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (note 12) $305,090 $303,632
Repurchase agreements (note 13) 33,426 23,769
Borrowed funds (note 14) 58,499 27,771
Advance payments by borrowers for taxes and insurance 423 361
Accrued interest payable 708 632
Other liabilities 1,128 1,179
-----------------------
Total liabilities 399,274 357,344
-----------------------
Commitments and contingencies (notes 8, 9 and 18)
STOCKHOLDERS' EQUITY (notes 1, 16 and 17)
Common stock, $.01 par value; shares authorized
5,000,000: shares issued 2,085,958 21 19
Additional paid-in capital 16,161 15,808
Retained earnings 12,511 9,090
Less: unearned compensation-ESOP (143) (179)
-----------------------
28,550 24,738
Unrealized gain (loss) on securities available for sale,
after tax effects (note 3) (417) 228
-----------------------
TOTAL STOCKHOLDERS' EQUITY 28,133 24,966
-----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $427,407 $382,310
=======================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 18
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31
- ----------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME: (Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Mortgage loans $12,373 $11,827 $11,389
Other loans 7,429 7,693 5,633
Mortgage-backed securities 878 2,392 1,596
Investment securities and securities available for sale 8,110 5,157 4,457
Interest bearing deposits in other banks 90 147 164
-----------------------------------
Total interest and dividend income 28,880 27,216 23,239
-----------------------------------
INTEREST EXPENSE:
Deposits (note 12) 11,363 10,630 8,260
Repurchase agreements 1,283 1,057 351
Borrowed funds 2,755 2,358 2,406
-----------------------------------
TOTAL INTEREST EXPENSE 15,401 14,045 11,017
-----------------------------------
Net interest and dividend income 13,479 13,171 12,222
Provision for loan losses (note 7) 722 2,602 432
-----------------------------------
NET INTEREST AND DIVIDEND INCOME AFTER PROVISION
FOR LOAN LOSSES 12,757 10,569 11,790
-----------------------------------
NON-INTEREST INCOME:
Loan and servicing fees 248 277 485
Deposit fees 1,844 1,473 1,338
Net gain (loss) from sales of investment securities
and securities available for sale (notes 3 and 4) (37) 12 (322)
Gain on sale of mortgage servicing rights (note 6) - 432 -
Net gain from sale of loans and other assets 174 44 357
Other 321 288 379
-----------------------------------
TOTAL NON-INTEREST INCOME 2,550 2,526 2,237
-----------------------------------
OPERATING EXPENSES:
Salaries and employee benefits (note 17) 5,594 5,333 4,897
Occupancy expense (note 9) 1,253 1,152 1,057
Office expense 1,240 1,053 1,055
FDIC Insurance 45 401 736
Data processing fees 1,213 685 818
Professional service fees 798 755 723
Marketing 704 674 429
Merger (note 1) - 736 718
Other 1,279 3,494 2,038
-----------------------------------
TOTAL OPERATING EXPENSES 12,126 14,283 12,471
-----------------------------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT 3,181 (1,188) 1,556
INCOME TAX BENEFIT (note 15) (240) (235) (690)
-----------------------------------
NET INCOME (LOSS) $ 3,421 $ (953) $ 2,246
===================================
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE $ 1.59 $ ( .46) $ 1.10
===================================
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,147,472 2,050,792 2,034,483
===================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 19
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Gain
Additional Unearned (Loss) on Securities
Common Paid-in Retained Compensation Available
Stock Capital Earnings ESOP For Sale, Net Total
-----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 18 $15,523 $ 7,797 $(250) $ (56) $23,032
Shares issued under stock incentive plans - 76 - - - 76
Payment of ESOP loan - - - 36 - 36
ESOP distribution - 9 - - - 9
NET INCOME - - 2,246 - - 2,246
Change in unrealized gain (loss) on
securities available for sale - - - (2,404) (2,404)
----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 18 15,608 10,043 (214) (2,460) 22,995
5% stock dividend 1 (1) - - - -
Shares issued under stock incentive plans - 178 - - - 178
Payment of ESOP loan - - - 35 - 35
ESOP distribution - 23 - - - 23
NET LOSS - - (953) - - (953)
Change in unrealized gain(loss) on
securities available for sale - - - - 2,688 2,688
----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 19 15,808 9,090 (179) 228 24,966
5% stock dividend 1 (1) - - - -
Shares issued under stock incentive plans 1 329 - - - 330
Payment of ESOP loan - - - 36 - 36
ESOP distribution - 25 - - - 25
NET INCOME - - 3,421 - - 3,421
Change in unrealized gain (loss) on
securities available for sale, net - - - - (645) (645)
----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 21 $16,161 $12,511 $(143) $ (417) $28,133
==================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 20
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Dollars in Thousands)
<S> <C> <C> <C>
Net income (loss) $ 3,421 $ (953) $ 2,246
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses 722 2,602 432
Provision for losses on other real estate owned - 1,694 453
Accretion of investment and mortgage-backed securities (48) (408) (125)
Net amortization of deferred loan fees 373 185 25
Depreciation and amortization expense 997 1,020 1,140
(Gain) loss on sale of investment securities available for sale, net 37 (12) 315
Loans originated for held for sale - - (2,490)
Proceeds from sales of loans - - 27,502
Net gain on sale of loans (244) (13) (357)
(Gain) loss on sale of other assets 70 (31) -
Gain on sales of other real estate owned - (45) (246)
Depreciation and writedown on real estate held for investment - 29 35
Increase in accrued interest receivable (410) (598) (458)
(Increase) decrease in other assets (1,221) 189 (1,473)
Increase in deferred income tax asset, net (466) (235) (690)
Increase in accrued interest payable 76 105 85
(Decrease) increase in accrued expenses and other liabilities (51) (643) 638
Increase in advance payments by borrowers for taxes and insurance 62 27 125
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,318 2,913 27,157
=================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and calls of investment securities held to maturity 14,814 13,650 11,596
Purchases of investment securities held to maturity (42,059) (28,270) (29,536)
Sales of securities available for sale 53,196 13,318 13,709
Purchase of securities available for sale (83,473) (3,057) (11,491)
Maturities and calls of securities available for sale 8,948 4,000 2,737
Purchase of mortgage-backed securities held to maturity (4,208) (7,619) (22,578)
Principal payments on securities available for sale 7,469 840 1,614
Principal payments on investments and mortgage-
backed securities held to maturity 4,525 4,322 4,777
Purchases of stock in Federal Home Loan Bank of Boston (150) (407) (1,439)
Sale of stock in Federal Home Loan Bank of Boston 1,343 - -
Proceeds from sales of other real estate owned, net of loans granted 1,128 968 1,131
Net increase in loans receivable (24,879) (23,843) (19,170)
Proceeds from sales of loans 17,638 2,689 888
Proceeds from sale of other assets 2,246 230 -
Capitalized additions to OREO - (36) (82)
Purchase of banking premises and equipment (700) (2,581) (565)
---------------------------------
NET CASH USED IN INVESTING ACTIVITIES (44,162) (25,796) (48,409)
=================================
</TABLE>
(Continued)
<PAGE> 21
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
December 31
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES: (Dollars in Thousands)
<S> <C> <C> <C>
Net increase in deposits $ 1,458 $ 23,896 $ 24,123
Net increase in repurchase agreements 9,657 6,624 11,134
Increase (decrease) in borrowed funds 30,728 (7,140) (12,338)
Principal paydown of ESOP debt 36 35 36
ESOP distribution 25 23 9
Issuance of common stock 330 178 76
---------------------------------
Net cash provided by financing activities 42,234 23,616 23,040
---------------------------------
Net increase in cash and cash equivalents 1,390 733 1,788
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,040 10,307 8,519
---------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,430 $ 11,040 $ 10,307
=================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during year for:
Interest on deposits and borrowed funds $ 15,325 $ 13,940 $ 10,538
=================================
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Loans transferred to other real estate owned $ 1,579 $ 1,258 $ 2,057
Loans charged off, net 1,592 2,005 528
Loans granted on sales of other real estate owned 1,153 1,732 2,394
Deferred gain on other real estate owned - 25 23
Real estate held for investment transferred to
other real estate owned - - 934
Investment securities transferred to securities available
for sale - 56,037 -
Gain on sale of mortgage servicing rights - 432 -
Other real estate owned transferred to banking premises
and equipment - 193 -
</TABLE>
See accompanying notes to financial statements.
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
Primary Bank is subject to the regulation, supervision and examination by
the Federal Deposit Insurance Corporation ("FDIC") and the New Hampshire
Banking Department. The Bank's deposits are insured by the Bank Insurance
Fund for deposits up to $100,000 and the Depositors Insurance Fund for
deposits in excess of $100,000. The Bank provides numerous services to
industry, commerce and government, including the maintenance of demand,
savings and time deposit accounts, cash management, merchant direct,
corporate card services and the granting of various types of mortgage loans
and other specialized loans. The services provided by the Bank to
individuals include checking accounts, savings and time accounts, cash
management services, mortgage loans, consumer and other installment loans,
credit arrangements, and secured and unsecured personal loans. The primary
market areas of the Bank are Hillsborough, Merrimack and Cheshire counties
in New Hampshire including the communities of Peterborough, Jaffrey, Antrim,
Weare, Hillsborough, Milford and Concord.
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. 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 date of the balance
sheet and income and expenses for the year. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to change relate
to the determination of the allowance for loan losses, the valuation of real
estate acquired in connection with foreclosures or in satisfaction of loans,
and the deferred tax asset valuation allowance.
(C) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Bank classifies debt and equity securities into one of three categories:
held to maturity, trading, or available for sale. The category in which the
securities are placed determines the valuation method to be applied. Debt
securities that the Bank 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 principally for the purpose of
selling them 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 are recorded at fair value with the
unrealized gains or losses net of related income taxes reported as a
separate component of stockholders' equity.
The Bank records investment security transactions on a trade date
basis. Gains and losses on sales of investment securities are recognized at
the time of sale on a specific identification basis. Premiums and discounts
are amortized and accreted on a straight-line basis, the result of which
approximates the effective interest method, and are included in interest
income. When a decline in value of a security is determined to be other than
temporary, the cost basis of the security is written down to fair value and
the impairment is charged to gain (loss) on sale of investment securities.
(D) LOANS
Loans are reported at the principal balance outstanding, net of deferred
loan origination fees. Loans on which the accrual of interest has been
discontinued are designated non-accrual. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and timely
collection of interest or principal, or when a loan becomes contractually
past due 90 days. When a loan is placed on non-accrual status, all interest
previously accrued but not collected is reversed against current period
interest income and amortization of related deferred fees is discontinued.
Interest accruals are resumed on such loans only when they are brought
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both
principal and interest.
(E) IMPAIRED LOANS
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a
<PAGE> 23
Loan-Income Recognition and Disclosures." These Statements require changes
in both the disclosure and impairment measurement of certain loans. Adoption
of these Statements had no material impact on the Bank's financial position
or results of operations.
Impaired loans are commercial and commercial real estate loans for
which it is probable that the Bank will not be able to collect all amounts
due according to the contractual terms of the loan agreement. The
definition of "impaired loans" is not the same as the definition of
"nonaccrual loans," although the two loan characterizations overlap;
nonaccrual loans include impaired loans.
Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical
expedient in the case of collateralized loans, the difference between the
fair value of the collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based on the fair value of
the collateral. Residential mortgage and consumer loans are measured for
impairment collectively.
Loans that experience insignificant payment delays and insignificant
shortfalls in payment amounts generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal and interest
owed.
Restructured, accruing loans entered into prior to the adoption of
SFAS No. 114 and SFAS No. 118 are not required to be reported as impaired
unless such loans are not performing according to the restructured terms at
adoption to SFAS No. 114. Loan restructuring entered into after adoption of
SFAS No.114 are reported as impaired loans, and impairment is measured as
described above using the loans' pre-modification rate of interest.
SFAS No. 114 also changes the criteria for classification of a loans as an
in-substance foreclosure. Beginning January 1, 1995, loans are classified
as in-substance foreclosures when the Bank is in possession of the
collateral.
(F) LOAN ORIGINATION FEES
Loan origination fees, net of certain direct loan origination costs, are
considered adjustments of interest rate yield and amortized into interest
income over the loan term by use of the interest method. When loans are
sold in the secondary market, the remaining balance of the amount deferred
is included in gain on sale of loans.
(G) ALLOWANCE FOR LOAN LOSSES
Losses on loans are provided for under the allowance method of accounting.
The allowance is increased by provisions charged to operations based on
amounts considered necessary to meet reasonably foreseeable losses.
Realized losses, net of recoveries are charged directly to the allowance.
The adequacy of the allowance is determined by management's evaluation of
the risk of loss based on an assessment of the types of loans in the
portfolio, delinquencies and other factors.
While management uses information available in establishing the allowance
for losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize additions to
the allowance based on judgments different from those of management.
(H) BANKING PREMISES AND EQUIPMENT
Land is stated at cost. Buildings and equipment are stated at cost less
allowances for depreciation and amortization computed on the straight-line
method over the estimated useful lives of the respective assets or the terms
of the respective leases, if shorter. The cost of maintenance and repairs
is charged to income as incurred.
(I) OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of properties acquired through
foreclosure or deed in lieu of foreclosure. OREO is initially recorded at
the lower of the carrying value of the loan or the fair value of the property
<PAGE> 24
with any losses being charged to the allowance for loan losses. After
foreclosure, foreclosed assets are presumed to be held for sale and are
recorded at the lower of the carrying value of the loan or the fair value of
the property actually received, minus estimated costs to sell. If the fair
value of the property, minus estimated selling costs, is less than the
carrying value of the loan, the deficiency is recognized as a valuation
allowance. Additions to the valuation allowance and costs related to
holding the property as realized are charged to real estate foreclosure and
holding costs. Writedowns are recorded as a reduction of the valuation
reserve. Costs relating to the development and improvement of the property
are capitalized.
Gains upon disposition are reflected in operations as realized; losses
are charged to the valuation allowance.
(J) INCOME TAXES
The Bank recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting and tax basis of the Bank's
assets and liabilities at enacted tax rates expected to be in effect when
the amounts related to such temporary differences are realized or settled.
The Bank's deferred tax asset is reviewed and adjustments to such asset are
recognized as deferred income tax expense or benefit based upon management's
judgment relating to the realizability of such asset.
(K) EARNINGS PER SHARE
Earnings per share is calculated by dividing net income for the period by
the weighted average number of shares of common and common equivalent shares
outstanding during the period. Common equivalent shares include the
incremental shares issued under the treasury stock method for stock options
considered to be exercised. Common shares outstanding exclude uncommitted
ESOP shares and include committed ESOP shares. Earnings per share for
applicable years, have been retroactively adjusted to reflect 5% stock
dividends paid in January, 1997 and October, 1995.
(L) RECLASSIFICATION
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation without effect on retained
earnings or net income.
(M) STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, cash and cash equivalents
include cash and due from banks, Federal funds sold, and interest bearing
deposits in other banks.
(N) RECENT ACCOUNTING DEVELOPMENTS
In June 1996, FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components
approach, after a transfer of financial assets, an entity recognizes all
financial and servicing assets it controls and liabilities it has incurred
and derecognizes financial assets it no longer controls and liabilities that
have been extinguished. The financial- components approach focuses on the
assets and liabilities that exist after the transfer. Many of these assets
and liabilities are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale, the transfer
is accounted for as a secured borrowing with a pledge of collateral.
The statement is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996,
and will be applied prospectively. Earlier or retroactive application of
this statement is not permitted. The Bank has determined that the adoption
of this statement will not have a material impact on its consolidated
financial statements.
- -------------------------------------------------------------------------------
NOTE 2
CASH AND CASH EQUIVALENTS
The Bank is required to maintain cash reserve balances with the Federal
Reserve Bank based upon a percentage of deposits. At December 31, 1996 and
1995, amounts in cash and cash equivalents included $7.1 million and $9.0
million, respectively, to satisfy such requirements.
<PAGE> 25
- -------------------------------------------------------------------------------
NOTE 3
SECURITIES AVAILABLE FOR SALE
The cost and fair value of securities available for sale at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1996
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $12,999 $ 8 $(220) $12,787
Corporate and other 999 - (12) 987
Mortgage-backed securities:
Fannie Mae 33,284 59 (233) 33,110
Freddie Mac 32,402 39 (260) 32,181
Ginnie Mae 3,577 1 (69) 3,509
----------------------------------------------
Total mortgage-backed securities 69,263 99 (562) 68,800
Marketable equity securities 409 83 (27) 465
----------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $83,670 $190 $(821) $83,039
==============================================
<CAPTION>
1995
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 3,021 $ 15 $ - $ 3,036
SBA Securities 553 4 - 557
U.S. Government agencies 29,579 119 (325) 29,373
Corporate and other 1,996 9 (16) 1,989
Mortgage-backed securities:
Fannie Mae 15,215 225 (107) 15,333
Freddie Mac 14,680 164 (86) 14,758
Ginnie Mae 4,119 166 - 4,285
Other 99 3 - 102
----------------------------------------------
Total mortgage-backed securities 34,113 558 (193) 34,478
Marketable equity securities 778 84 (27) 835
----------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $70,040 $789 $(561) $70,268
==============================================
</TABLE>
As of December 31, 1996, the Bank had debt securities available for sale
with callable features of $9.0 million at amortized cost and $8.9 million at
fair value.
Realized gains on securities available for sale for the years ended December
31, 1996, 1995, and 1994 amounted to $284,000, $103,000, and $19,000,
respectively. Realized losses for the same periods amounted to $321,000,
$91,000 and $334,000.
<PAGE> 26
The maturity distribution of securities available for sale at December 31,
1996 is summarized as follows:
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------
(Dollars in Thousands)
Fair
Cost Value
- ------------------------------------------------------------------
<S> <C> <C>
Within 1 year $ 1,048 $ 1,052
1 to 2 years - -
2 to 5 years 12,998 12,769
Over 5 years 69,215 68,753
------------------
83,261 82,574
Marketable equity securities 409 465
------------------
$83,670 $83,039
==================
</TABLE>
Mortgage-backed securities have a maturity greater than 5 years. Principal
and interest payments are received on a monthly basis. Maturities of
mortgage-backed securities are based on their contractual maturities.
Actual maturities may differ due to prepayments.
- -------------------------------------------------------------------------------
NOTE 4
INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and fair value of investment securities held to maturity
at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996
- ----------------------------------------------------------------------------------
(Dollars in Thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $58,211 $105 $(493) $57,823
SBA Securities 1,011 11 (7) 1,015
Municipal obligations 421 - - 421
--------------------------------------------
TOTAL INVESTMENT SECURITIES $59,643 $116 $(500) $59,259
============================================
<CAPTION>
1995
- ----------------------------------------------------------------------------------
(Dollars in Thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $28,704 $289 $(159) $28,834
SBA Securities 1,317 53 (7) 1,363
Municipal obligations 2,769 - - 2,769
--------------------------------------------
TOTAL INVESTMENT SECURITIES $32,790 $342 $(166) $32,966
============================================
</TABLE>
Municipal obligations represent obligations of cities and towns in New
Hampshire and are not readily saleable.
As of December 31, 1996, the Bank had investment securities held to maturity
with callable features of $56.5 million at amortized cost and $56.2
million at fair value.
<PAGE> 27
The maturity distribution of investment securities held to maturity at
December 31, 1996 is summarized as follows:
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------
(Dollars in Thousands)
Amortized Fair
Cost Value
- ------------------------------------------------------------------
<S> <C> <C>
Within 1 year $ - $ -
1 to 2 years 28 28
2 to 5 years 4,391 4,367
Over 5 years 55,224 54,864
--------------------
$ 59,643 $59,259
====================
</TABLE>
- -------------------------------------------------------------------------------
NOTE 5
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The amortized cost and fair value of mortgage-backed securities held to
maturity at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------------------------------
(Dollars in Thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Fannie Mae $ 7,030 $ 32 $(141) $ 6,921
Freddie Mac 1,000 - (99) 901
Ginnie Mae 7,227 112 (113) 7,226
Other backed securities 424 - (11) 413
-----------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES $15,681 $144 $(364) $15,461
===============================================
<CAPTION>
1995
- ------------------------------------------------------------------------------------------
(Dollars in Thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Fannie Mae $ 4,643 $ 9 $ (44) $ 4,608
Freddie Mac 1,000 - (99) 901
Ginnie Mae 9,102 41 (130) 9,013
Other backed securities 621 - (11) 610
-----------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES $15,366 $ 50 $(284) $15,132
===============================================
</TABLE>
Mortgage-backed securities have a maturity greater than 5 years. Principal
and interest payments are received on a monthly basis. Maturities of
mortgage-backed securities are based on their contractual maturities.
Actual maturities may differ due to prepayments.
- -------------------------------------------------------------------------------
NOTE 6
LOANS
The Bank's lending activities are conducted principally in central and
southern New Hampshire. The Bank grants single family residential loans,
commercial real estate loans, commercial loans and a variety of consumer
loans. In addition, the Bank grants loans for the construction of
residential homes, commercial real estate properties, and for land
development. The ability and willingness of residential mortgage and
consumer loan borrowers to honor their repayment commitments is generally
impacted by the level of overall economic activity within the borrowers'
<PAGE> 28
geographic areas and real estate values. The ability and willingness of
commercial real estate, construction loan and commercial borrowers to honor
their repayment commitments is generally impacted by the health of the real
estate economic sector in the borrowers' geographic areas and the general
economy. The Bank is limited by statute from lending to any one borrower
amounts in excess of 15% of stockholders' equity.
Total loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Residential - fixed rate $ 5,559 $ 7,464
Residential - variable rate 56,214 60,217
Construction 2,325 642
Commercial and Multi-family - fixed rate 28,854 16,418
Commercial and Multi-family - variable rate 59,922 59,468
Government guaranteed purchased loans 6,931 4,383
---------------------
MORTGAGE LOANS 159,805 148,592
---------------------
Installment 8,009 8,152
Home equity 11,989 12,894
Second mortgage 2,040 1,749
Commercial - fixed rate 11,894 8,668
Commercial - variable rate 30,852 34,049
Government guaranteed purchased loans 10,948 19,244
---------------------
OTHER LOANS 75,732 84,756
---------------------
Total loans $235,537 $233,348
=====================
</TABLE>
Loans on non-accrual at December 31, 1996, 1995 and 1994 totaled $2.1
million, $5.9 million, and $4.3 million, respectively. Restructured loans
at December 31, 1996, 1995 and 1994 were $380,000, $423,000, and $2.5
million, respectively. The reduction in interest income, for the year ended
December 31 associated with non-accrual and restructured loans held at the
end of such years, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Income in accordance with original terms $416 $699 $674
Income recognized 95 242 183
--------------------
REDUCTION IN INTEREST INCOME $321 $457 $491
====================
</TABLE>
At December 31, 1996, total impaired loans were $1.9 million with a related
general allowance for loan losses of $291,000. During the year ended
December 31, 1996, the average recorded investment in net impaired loans was
$3.4 million. For the year ended December 31, 1996, the Bank recognized
interest income on those impaired loans of $67,000, using the cash basis
method of income recognition.
At December 31, 1995, total impaired loans were $4.1 million with a
related general allowance for loan losses of $747,000. During the year
ended December 31, 1995, the average recorded investment in net impaired
loans was $4.3 million. For the year ended December 31, 1995, the Bank
recognized interest income on those impaired loans of $118,000, using the
cash basis method of income recognition.
Loans outstanding to officers, trustees and employees of the Bank were
$2.5 million and $4.4 million at December 31, 1996 and 1995, respectively.
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable loans with unaffiliated persons and do not involve more than a
normal risk of collection or present other favorable features.
Loans serviced for others amounted to $49.0 million at December 31,
1994. In December 1994, the Bank entered into an agreement to sell
approximately $49.0 million of its mortgage loan servicing portfolio. As a
result of this transaction the Bank recorded a gain of $432,000 during 1995.
<PAGE> 29
- -------------------------------------------------------------------------------
NOTE 7
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 3,447 $ 2,850 $ 2,946
Provision charged to operations 722 2,602 432
Loans charged off (1,827) (2,168) (925)
Recoveries on loans previously charged off 235 163 397
-----------------------------
Net charge-offs (1,592) (2,005) (528)
-----------------------------
BALANCE AT END OF YEAR $ 2,577 3,447 $ 2,850
=============================
</TABLE>
The allowance for loan losses at December 31 is allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Residential and construction $ 698 $ 1,152 $ 976
Commercial real estate and commercial 1,799 2,035 1,790
Other 80 260 84
-----------------------------
$ 2,577 $ 3,447 $ 2,850
=============================
</TABLE>
- -------------------------------------------------------------------------------
NOTE 8
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank 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 unused lines of credit, unadvanced
portions of construction loans, commitments to originate loans, standby
letters of credit, and commitments to purchase loans. The instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts in balance sheets. The amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to its financial instruments (for unused lines of credit,
loan commitments to originate and purchase loans, and standby letters of
credit) is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
borrower.
Financial instruments with off-balance sheet risk at December 31 is as
follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Unused lines of credit $34,249 $24,762
Unadvanced portions of construction loans 1,079 129
Commitments to originate loans 9,323 10,332
Standby letters of credit 554 507
Commitments to purchase loans - 214
</TABLE>
Commitments to originate and purchase loans, unused lines of credit and
unadvanced portions of construction 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 may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the
Bank 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.
<PAGE> 30
- -------------------------------------------------------------------------------
NOTE 9
BANKING PREMISES AND EQUIPMENT
A summary of banking premises and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Banking premises $ 7,551 $ 7,158
Equipment 2,058 2,009
Data processing 2,113 2,292
Leasehold improvements 1,179 1,190
----------------------
12,901 12,649
Less accumulated depreciation and amortization 4,086 3,532
----------------------
$ 8,815 $ 9,117
======================
</TABLE>
As of December 31, 1996, the Bank was obligated under noncancelable
operating leases for premises. Minimum future rentals under such leases are
as follows:
<TABLE>
<CAPTION>
Year Ending December 31 Amount
- -------------------------------------------------
(Dollars in Thousands)
<S> <C>
1997 $ 355
1998 335
1999 268
2000 226
Thereafter 1,630
------
$2,814
======
</TABLE>
Rent expense amounted to $431,000, $394,000, and $350,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
- -------------------------------------------------------------------------------
NOTE 10
OTHER REAL ESTATE OWNED
A summary of these assets by property type at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Land $ 506 $ 580
Commercial real estate 325 1,249
1-4 Family residential 1,102 1,353
Multi-family residential 110 55
-----------------
2,043 3,237
Less: Allowance for losses (63) (1,149)
-----------------
$1,980 $ 2,088
=================
</TABLE>
<PAGE> 31
An analysis of the allowance for losses for other real estate owned for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
- ---------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,149 $ 95 $ 50
Provisions charged to expense (recovery) (484) 1,694 453
Writedowns on properties held (602) (640) (408)
-------------------------
Balance at end of year 63 1,149 95
=========================
</TABLE>
- -------------------------------------------------------------------------------
NOTE 11
STOCK IN FEDERAL HOME LOAN BANK OF BOSTON
As a member of the Federal Home Loan Bank of Boston ("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 home loans or 1/20th of its outstanding
advances from the FHLB of Boston, whichever is higher. As and when such
stock is redeemed, the Bank would receive from the FHLB of Boston an amount
equal to the par value of the stock.
- -------------------------------------------------------------------------------
NOTE 12
DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------
(Dollars in Thousands)
Weighted Weighted
Average Average
Amount Stated Rate Amount Stated Rate
<S> <C> <C> <C> <C>
Regular savings accounts $ 51,036 2.47 $ 51,438 2.47%
Term deposit accounts 155,128 5.57 153,034 5.87
Money market deposit accounts 25,915 2.64 28,699 2.77
NOW accounts 41,544 1.39 36,892 1.58
Demand deposits and official checks 31,467 - 33,569 -
---------------------------------------------
TOTAL DEPOSITS $305,090 $303,632
=============================================
</TABLE>
Contractual maturities of term deposits at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996
- --------------------------------------------------------------------
(Dollars in Thousands)
Under Over
$100 $100 Total Percent
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within 3 months $ 34,574 $ 3,635 $ 38,209 24.6%
Due within 3-6 months 25,598 3,760 29,358 18.9
Due within 6-12 months 26,885 2,976 29,861 19.3
Thereafter 50,423 7,277 57,700 37.2
----------------------------------------
TOTAL $137,480 $17,648 $155,128 100.0%
========================================
</TABLE>
<PAGE> 32
Interest on savings deposits by type for the year ended December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Years Ended December 31
- ------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Regular savings $ 1,277 $ 1,532 $1,759
Term deposits - $100,000 or more 782 1,041 485
Term deposits - less than $100,000 8,059 6,513 4,203
Money market account 689 954 1,260
NOW accounts 545 577 530
Advance payments by borrowers 11 13 23
----------------------------
$11,363 $10,630 $8,260
============================
</TABLE>
- -------------------------------------------------------------------------------
NOTE 13
REPURCHASE AGREEMENT
Repurchase agreements are short-term borrowings with maturities ranging from
one day to one year. The following table summarizes information regarding
repurchase agreements for the years ended December 31.
<TABLE>
<CAPTION>
Years Ended December 31
- ----------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance outstanding at end of year $33,426 $23,769 $17,145
=============================
Maximum amount outstanding during year $37,897 $32,599 $19,199
=============================
Average amount outstanding during year $26,493 $20,117 $ 8,146
=============================
Weighted average interest rates 4.84% 5.26% 4.32%
=============================
Book value at end of year of collateral pledged
as security for agreements <F1> $44,699 $41,663 $29,981
=============================
Market value at end of year of collateral pledged
as security for agreements <F1> $44,187 $41,411 $27,659
=============================
- --------------------
<FN>
<F1> Repurchase agreements are collateralized by certain investment securities.
</FN>
</TABLE>
- -------------------------------------------------------------------------------
NOTE 14
BORROWED FUNDS
Total borrowed funds from the Federal Home Loan Bank of Boston are secured
by a blanket lien on the Bank's investments except those securities
identified as collateral for repurchase agreements as well as 1-4 family
residential loans. The Bank has a line of credit available with the FHLB of
Boston. The line of credit is for $7.6 million and has no fixed expiration
date. A summary of advances outstanding at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------
(Dollars in Thousands)
Range of Range of
Amount Rates Amount Rates
--------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $42,181 5.39 - 7.32% $25,168 5.70 - 8.65%
Due from one to three years 16,318 4.69 - 6.31% 2,603 4.69%
------- -------
58,499 $27,771
======= =======
</TABLE>
<PAGE> 33
- -------------------------------------------------------------------------------
NOTE 15
INCOME TAXES
The Bank donated a parcel of foreclosed property, valued at $365,000, to the
Community Development Finance Agency of the State of New Hampshire. In
return for this donation, the Bank received a credit against the state
dividend tax of $273,750, which was used to offset the Bank's liability for
the dividend tax. With the repeal of the dividends tax, this credit was
used to offset the Bank's business enterprise tax. In 1994, the Bank
donated two parcels of foreclosed properties, valued at $245,000 in which
the Bank received a credit to offset the Bank's business enterprise tax in
the amount of $183,750. The use of the credit is limited to $200,000 per
year. At December 31, 1996, the balance of the unused credit was
approximately $230,000.
The components of Federal income tax benefit presented in the consolidated
statements of operations is as follows for the years ended December 31:
<TABLE>
<CAPTION>
Years Ended December 31
- ----------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred 1,189 (587) 758
Change in valuation reserve (1,429) 352 (1,448)
---------------------------
$ (240) $(235) $ (690)
===========================
</TABLE>
The effective income tax rates for the years ended December 31, 1996, 1995
and 1994 were (7.5%), (19.8%) and (44.3%), respectively. A reconciliation
of "expected" tax expense (benefit) at the statutory Federal income tax rate
to actual tax benefit is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
- ------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Computed "expected" income tax (benefit) at statutory rate $ 1,107 $(404) $ 529
Items affecting the Federal Income tax rate:
Tax-exempt income (32) (51) (39)
Change in base-year tax reserve (43) (147) 190
Dividends received deduction (3) (4) (4)
(Decrease) increase in valuation reserve account (1,429) 352 (1,448)
Other 160 19 82
----------------------------
$ (240) $(235) $ (690)
============================
</TABLE>
<PAGE> 34
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax
liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses $ 819 $ 1,445
Other real estate owned reserves 21 391
Federal and State net operating loss carryforwards 2,097 2,271
Tax credit carryforwards 195 182
Charitable contribution carryforward 101 103
Deferred compensation 37 44
Unrealized loss on securities available for sale 215 -
Depreciation 141 87
Other 114 -
------------------
Total gross deferred income tax assets 3,740 4,523
Less: valuation reserve (1,277) (2,706)
------------------
Net deferred income tax assets 2,463 1,817
------------------
Deferred income tax liabilities:
Cash surrender value of life insurance (262) (226)
Deferred loan origination fees (160) (191)
Other - (40)
------------------
Total gross deferred income tax liabilities (422) (457)
------------------
$ 2,041 $ 1,360
==================
</TABLE>
Management believes the existing net deductible temporary differences that
give rise to the net deferred income tax asset will reverse in periods the
Bank generates net taxable income. In addition, gross deductible temporary
differences are expected to reverse in periods during which off-setting
gross taxable temporary differences are expected to reverse. At December
31, 1996, the Bank would need to generate approximately $5.6 million of
future net taxable income to realize the net deferred income tax asset.
Management believes that it is more likely than not that the net deferred
income tax asset at December 31, 1996 will be realized based on the
significant reduction in the level of non-performing assets.
It should be noted, however, that factors beyond Management's control,
such as the general state of the economy and real estate values, can affect
future levels of taxable income and that no assurance can be given that
sufficient taxable income will be generated to fully absorb gross deductible
temporary differences.
As of December 31, 1996, the Bank has net operating loss carryforwards
available for federal tax purposes of $6.0 million. The subsequent
realization of $2.5 million attributable to the merger in 1995 with Horizon
Bank and Trust is subject to limitation as defined in Internal Revenue Code
Section 382 due to the change in ownership. The remaining $3.5 million may
be subject to significant limitation under the provisions of section 382 in
the event of a future ownership change.
<PAGE> 35
- -------------------------------------------------------------------------------
NOTE 16
RETAINED EARNINGS AND REGULATORY MATTERS (In Thousands)
In accordance with banking regulations, the Bank established a "Liquidation
Account" in the amount equal to the consolidated net worth of the Bank at
December 31, 1992 for the benefit of eligible account holders who continue
to maintain their accounts in the Bank after conversion.
The "Liquidation Account" amounted to $2.2 million (unaudited) at
December 31, 1996 and will be reduced in proportion to reductions in the
balances of eligible account holders as determined on each subsequent fiscal
year end.
Subsequent increases will not restore an eligible account holder's
interest in his liquidation subaccount. In the event of complete
liquidation or dissolution of the Bank, eligible account holders are
entitled to their interest in the liquidation account in the same proportion
that the balance of their qualifying deposit account bears to the total
account balance at that date. The existence of the "Liquidation Account"
does not restrict the use of net worth.
The Bank may not declare or pay any cash dividend on its Common Stock
if the effect thereof would cause the net worth of the Bank to be reduced
below the amount required to be maintained for the "Liquidation Account" and
to maintain compliance with minimum regulatory capital.
Legislation was enacted in 1996 to repeal most of Section 593 of the
Internal Revenue Code pertaining to how qualified savings institutions
calculate their bad debt deduction for federal income tax purposes. This
legislation eliminated the Bank's ability to compute its bad debt deduction
utilizing the percentage-of-taxable-income method. It also suspended the
recapture of the pre-1988 tax bad debt reserves and will require the
recapture of these amounts only under very limited circumstances. It does
require the recapture of the post-1987 tax bad debt reserves over a six year
period. The Bank's pre-1988 tax bad debt reserves which have been suspended
total $5.7 million and the amount of the post-1988 reserves which will be
recaptured into income are $302,000.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
following table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital (Under Prompt Corrective
Actual Adequacy Action Provisions)
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets) $31,063 12.87% $19,315 >or= 8.0% $24,144 >or= 10.0%
Tier I capital
(to risk weighted assets) $28,486 11.80% $ 9,657 >or= 4.0 $14,486 >or= 6.0
Tier I capital
(to average assets) $28,486 6.73% $16,922 >or= 4.0 $21,152 >or= 5.0
</TABLE>
<PAGE> 36
- -------------------------------------------------------------------------------
NOTE 17
EMPLOYEE BENEFIT AND STOCK OPTION PLANS
401(K) Plan
The Bank maintains a 401(k) Savings and Employee Stock Ownership Plan (the
"ESOP"), covering all salaried employees who become eligible to participate
upon obtaining the age of 21 and completing a year of service. Participants
may contribute from 1% to 15% of their pre-tax compensation. The Bank makes
annual matching contributions equal to 50% of the first 4% of participants'
contributions. Employer matching contributions vest 20% per year beginning
after 2 years of employment. Employer matching contributions were
approximately $63,000, $52,000 and $43,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
Discretionary bonuses paid under the plan during the years ended
December 31, 1996 and 1995 and 1994 were $105,000, $123,000 and $70,000,
respectively.
Employees eligible to participate in the 401(k) Plan are eligible to
participate in the ESOP component of the plan. The ESOP borrowed $250,000
from the Bank in order to purchase 31,250 shares of Common Stock. The loan
to the ESOP will be repaid principally from the Bank's contributions to the
ESOP over a period of seven years. Compensation expense related to the ESOP
amounted to approximately $76,000, 80,000 and $51,000 for 1996, 1995 and
1994, respectively.
Shares purchased by the ESOP will be held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account in an amount proportional
to the repayment of the ESOP loan will be allocated among participants on
the basis of compensation in the year of allocation. Benefits generally
become 100% vested after five years of credited service. For those
employees who become participants as of and subsequent to January 1, 1993, a
year of credited service will be earned each calendar year in which they
complete 1,000 hours of service for the Bank. Prior to the completion of
five years of credited service, a participant who terminates employment for
reasons other than death, retirement, or disability, will not receive any
benefit. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits are payable
upon death, retirement, disability or separation from service.
The Bank offers options on its common stock to officers, employees and
directors under the 1993 Stock Option Plan for Outside Directors, the 1995
Stock Option Plan for Outside Directors, the 1993 Incentive Stock Option
Plan, the 1995 Incentive Stock Option Plan, the Bank's Recognition and
Retention Plan for Outside Directors and the Bank's Recognition and
Retention Plan for Officers and Employees. The Bank applies Accounting
Practice Bulletin (APB) No. 25 and related interpretations in accounting for
its plans.
Accordingly, no compensation cost has been recognized. Had
compensation cost been determined consistent with SFAS No. 123, the Bank's
net income and earnings per share for the years ended December 31 would have
been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Net income (loss):
As reported $3,421 $ (953)
Proforma $3,108 $(1,496)
Fully diluted earnings (loss) per share:
As reported $ 1.59 ($.46)
Proforma $ 1.45 ($.73)
</TABLE>
<PAGE> 37
The fair value of each option grant for the fixed stock option plan and
performance-based stock option plan is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: expected
volatility of approximately 40 percent in both years; range of risk-free
interest rates for the fixed plan of 5.7 percent in 1996 and 6.1 percent to
7.6 percent in 1995 and for the performance-based of 6.3 percent in 1996 and
6.1 percent in 1995; and expected lives of seven years for the fixed plan
and five years for the performance-based plan.
Under the 1993 Stock Option Plan for Outside Directors, the Bank may
grant options to its directors up to 89,050 shares of common stock. Under
the 1995 Stock Option Plan for Outside Directors, the Bank may grant options
to its directors up to 35,000 shares of common stock. Under the 1993
Incentive Stock Option Plan, the Bank may grant options to its officers and
employees up to 143,750 shares of common stock. Under the 1995 Incentive
Stock Option Plan, the Bank may grant options to its officers and employees
up to 125,000 shares of common stock. Under the Bank's Recognition and
Retention Plan for Outside Directors, the Bank may grant options to its
directors up to 18,750 shares of common stock. Under the Bank's Recognition
and Retention Plan for Officers and Employees, the Bank may grant options to
its officers and employees up to 12,500 shares of common stock. Under all
plans, the exercise price of each option equals the market value of the
stock on the date the options are granted, and all options expire ten years
from the date granted. Under the Recognition and Retention Plan for Outside
Directors vesting is 33 1/3% per year from date of conversion. Under the
Bank's Recognition and Retention Plan for Officers and Employees vesting is
25% per year from the date of conversion. Under the 1993 Stock Option Plan
for Outside Directors 100% is exercisable upon the date of conversion.
Under the 1993 Stock Option Plan for Officers and Employees vesting is 33
1/3% from the date of the grant. Under the 1995 Stock Option Plan for
Outside Directors and the 1995 Stock Option Plan for Officers and Employees,
options vest in increments when the fair market value of the stock exceeds
the fair market value at grant date (exercise or base price) with a maximum
vesting period of ten years. Increases in the fair market value of 150%,
175% and 200% cause the options to vest 50%, 25% and 25%, respectively.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1996 and 1995 and changes during the years then ended are
presented below.
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------
Number of Weighted Number of Weighted
Unexercised Average Unexercised Average
Options Option Price Options Option Price
<S> <C> <C> <C> <C>
Options at beginning of year 281,154 $8.32 234,039 $ 7.60
Granted 7,940 $8.60 62,247 $10.76
Exercised (25,219) $7.26 (15,132) $ 7.26
Canceled (807) $9.30 - -
------- -------
Options at end of year 263,068 $8.43 281,154 $ 8.32
Options exercisable at year end 207,241 $7.87 167,860 $ 7.41
</TABLE>
<PAGE> 38
The following table summarizes information about fixed stock options
outstanding at December 31,1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg. Weighted Avg. Weighted Avg.
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$7.26 to $8.62 172,927 6.8 $ 7.28 171,245 $ 7.28
$9.30 to $10.88 71,012 8.1 $10.03 29,619 $10.23
$12.47 to $12.70 19,129 8.6 $12.66 6,377 $12.65
$7.26 to $12.70 263,068 7.3 $ 8.42 207,241 $ 7.87
</TABLE>
A summary of the status of the Company's performance-based stock option
plans as of December 31, 1996 and 1995 and changes during the years then
ended are presented below:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------
Number of Weighted Number of Weighted
Unexercised Average Unexercised Average
Options Option Price Options Option Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options at beginning of year 40,950 $13.10 - -
Granted 49,284 $12.38 40,950 $13.10
Exercised - - - -
Canceled - - - -
-----------------------------------------------------
Options at end of year 90,234 $12.71 40,950 $13.10
Options exercisable at year end - $ - - $ -
</TABLE>
- -------------------------------------------------------------------------------
NOTE 18
CONTINGENCIES
The Bank is involved in various legal proceedings incidental to its
business. After review with legal counsel, management does not believe
resolution of this litigation will have a material effect on the financial
condition of the Bank.
- -------------------------------------------------------------------------------
NOTE 19
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of the Statement of
Financial Accounting Standards No.107, "Disclosures About Fair Value of
Financial Instruments" ("SFAS 107"). The estimated fair value amounts have
been determined by using available quoted market information or other
appropriate valuation methodologies at year-end, and are not indicative of
the fair value of those instruments at the date this report is published.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Because no market exists for a portion of
the 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 judgment and therefore cannot be determined with precision.
Changes in assumptions could 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. Assets and liabilities that are not
considered financial instruments include other real estate owned, the
deferred income tax asset, and banking premises and equipment. 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.
The estimation methodologies used, the carrying values and the
estimated fair values for the Bank's financial instruments follows.
<PAGE> 39
Financial instruments actively traded in a secondary market have been valued
using quoted available market prices as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------
(Dollars in Thousands)
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
Available for sale $ 14,239 $ 14,239 $ 35,790 $ 35,790
Held to maturity 59,643 59,259 32,790 32,966
Mortgage-backed securities:
Available for sale 68,800 68,800 34,478 34,478
Held to maturity 15,681 15,461 15,366 15,132
</TABLE>
The fair value of financial instruments with stated maturities have been
estimated by discounting cash flows with a discount rate approximately equal
to the current market rate for similar instruments as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------
(Dollars in Thousands)
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, net $232,960 $231,620 $229,901 $228,955
Term deposits 155,128 155,733 153,034 153,795
Borrowed funds 58,499 58,424 27,771 27,682
</TABLE>
The fair value of financial instruments with no maturity or short-term
maturities approximates its carrying value as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------
(Dollars in Thousands)
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 12,430 $ 12,430 $ 11,040 $ 11,040
Accrued interest receivable 3,355 3,355 2,945 2,945
Stock in FHLB of Boston 3,150 3,150 4,343 4,343
Demand deposit and official checks 31,467 31,467 33,569 33,569
NOW accounts 41,544 41,544 36,892 36,892
Regular savings accounts 51,036 51,036 51,438 51,438
Money market deposit accounts 25,915 25,915 28,699 28,699
Repurchase agreements 33,426 33,426 23,769 23,769
Advance payments by borrowers 423 423 361 361
Accrued interest payable 708 708 632 632
</TABLE>
The fair value of commitments to extend credit have been estimated using
fees charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counter-parties. The fair value of commitments to sell loans are estimated
as the cost to cancel such agreements.
<PAGE> 40
The fair value of financial instruments with off-balance sheet risk have
been estimated as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
Contract or Estimated Contract or Estimated
Notional Amount Fair Value Notional Amount Fair Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $10,402 $104 $10,461 $105
</TABLE>
- -------------------------------------------------------------------------------
NOTE 20
QUARTERLY DATA
The following quarterly information is presented for the two years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Years Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr <F4> 3rd Qtr 2nd Qtr 1st Qtr <F3>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $7,605 $7,269 $7,020 $6,986 $ 7,172 $6,967 $ 6,659 $6,418
Interest expense 3,969 3,902 3,806 3,724 3,814 3,636 3,445 3,150
------------------------------------------------------------------------------------
Net interest and dividend income
before provision for loan losses 3,636 3,367 3,214 3,262 3,358 3,331 3,214 3,268
Provision for loan losses 36 390 242 54 1,767 203 246 386
------------------------------------------------------------------------------------
Net interest and dividend income
after provision for loan losses 3,600 2,977 2,972 3,208 1,591 3,128 2,968 2,882
Non-interest income 659 655 707 529 508 536 556 926
Operating expense 3,246 2,897 3,033 2,950 4,814 2,866 2,784 3,819
------------------------------------------------------------------------------------
Income (loss) before income taxes 1,013 735 646 787 (2,715) 798 740 (11)
Income tax benefit <F2> - (100) (140) - (235) - - -
------------------------------------------------------------------------------------
Net income (loss) $1,013 $ 835 $ 786 $ 787 $(2,480) $ 798 $ 740 $ (11)
------------------------------------------------------------------------------------
Earnings (loss) per share <F1> $ .47 $ .40 $ .37 $ .37 $ (1.21) $ .38 $ .35 $ .00
Dividends per share N/A N/A N/A N/A N/A N/A N/A N/A
- --------------------
<FN>
<F1> Computation of earnings per share is further described in Note 1.
<F2> The tax benefit recognized is based upon management's assessment of the
valuation allowance associated with the net deferred income tax asset
(see Note 15).
<F3> Included in the 1995 first quarter net loss was merger expenses of
$736,000 related to the acquisition of Horizon Bank and Trust.
<F4> Included in the 1995 fourth quarter net loss are provisions to the
allowance for loan losses and OREO reserve for losses and related
expenses of $1.7 million and $1.6 million, respectively, related to the
accelerated asset disposition plan.
</FN>
</TABLE>
<PAGE> 41
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1997
7745
----
(FDIC Insurance Certificate Number)
PRIMARY BANK
------------
(Exact name of Bank as specified in its Charter)
NEW HAMPSHIRE
-------------
(State of Incorporation)
02-0178110
----------
(I.R.S. Employer Identification Number)
35 MAIN STREET, PETERBOROUGH, NH
--------------------------------
(Address of Principal Executive Offices)
03458
-----
(Zip Code)
(603) 924-7142
--------------
(Bank's Telephone Number, including area code)
Indicate by check mark whether the Bank (1) has filed all reports required
to be filed by section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Bank was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of each of the Bank's classes of common
stock as of the latest practicable date is as follows:
CLASS: COMMON STOCK, PAR VALUE $.01 PER SHARE
OUTSTANDING AS OF MARCH 31, 1997: 2,087,342 SHARES
<PAGE>
CONTENTS
ITEM 1. - FINANCIAL STATEMENTS
BALANCE SHEETS
March 31, 1997 and December 31, 1996 . . . . . . . . . 1
STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1997 and 1996 . . . . 2
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1997 and 1996 . . . . 3
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1996 . . . . 4 - 5
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . 6 - 12
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 13 - 15
OTHER INFORMATION . . . . . . . . . . . . . . . 16 - 21
<PAGE>
PRIMARY BANK
BALANCE SHEETS
(DOLLARS IN THOUSANDS) EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 11,462 $ 12,430
Securities available for sale (note 2) 90,072 83,039
Investment securities held to maturity (note 3) 54,666 59,643
Mortgage-backed securities held to maturity (note 4) 15,213 15,681
Loans (note 5) 242,549 235,537
Less allowance for loan losses (2,481) (2,577)
------------------------
Net loans 240,068 232,960
------------------------
Banking premises and equipment 9,273 8,815
Other real estate owned, net (note 6) 1,846 1,980
Accrued income receivable 2,888 3,355
Stock in the FHLB of Boston, at cost 3,537 3,150
Other assets 4,558 4,313
Deferred income tax asset, net (note 10) 2,133 2,041
------------------------
Total assets $435,716 $427,407
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 7) $308,207 $305,090
Customer repurchase agreements 27,552 33,426
Borrowed funds (note 8) 68,684 58,499
Advance payments by borrowers for taxes 790 423
Accrued interest payable 673 708
Other liabilities 967 1,128
------------------------
Total liabilities 406,873 399,274
------------------------
Stockholders' Equity
Common Stock (par value $.01 per share,
2,087,342 shares outstanding) 21 21
Additional paid-in capital 16,172 16,161
Retained earnings 13,390 12,511
Less: Unearned Compensation - ESOP (143) (143)
------------------------
29,440 28,550
Unrealized loss on securities available for sale,
after tax effects (note 2) (597) (417)
------------------------
Total Stockholders' Equity 28,843 28,133
------------------------
Total Liabilities and Stockholders' Equity $435,716 $427,407
========================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 1
PRIMARY BANK
STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS) EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
---- ----
Interest Income:
- ----------------
<S> <C> <C>
Mortgage loans $3,290 $3,014
Other loans 1,823 1,980
Mortgage-backed securities 259 214
Investment securities and securities available for sale 2,312 1,758
Interest bearing deposits in other banks 6 20
------------------
Total interest and dividend income 7,690 6,986
------------------
Interest Expense:
- -----------------
Deposits 2,764 2,869
Repurchase agreements 375 276
Borrowed funds 892 579
------------------
Total interest expense 4,031 3,724
------------------
Net interest and dividend income 3,659 3,262
Provision for loan losses 150 54
------------------
Net interest and dividend income after provision for loan losses 3,509 3,208
------------------
Other Income:
- -------------
Loan fees 77 70
Deposit fees 483 415
Net gain on sale of securities available for sale 4 30
Gain (loss) on sale of assets 2 (59)
Other 85 73
------------------
Total other income 651 529
------------------
Operating Expenses:
- -------------------
Salaries and employee benefits 1,471 1,341
Occupancy expense 324 321
Office expense 313 331
FDIC Insurance 9 22
Data processing fees 317 289
Professional service fees 173 82
Marketing 174 150
Other 500 414
------------------
Total operating expense 3,281 2,950
------------------
Net income $ 879 $ 787
==================
Earnings per common and common equivalent share $ .40 $ .37
Average common and common equivalent shares outstanding 2,203,569 2,099,578
</TABLE>
<PAGE> 2
PRIMARY BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Unearned Gain (Loss)
Additional Compensa- on Securities
Common Paid-in Retained tion Available
Stock Capital Earnings ESOP For Sale,Net Total
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $19 $15,808 $ 9,090 $(179) $ 228 $24,966
Shares issued under stock incentive plans - 16 - - - 16
Net income for the three months ended
March 31, 1996 - - 787 - - 787
Change in unrealized gain (loss) on
securities available for sale - - - - ( 853) (853)
-------------------------------------------------------------
Balance at March 31, 1996 $19 $15,824 $ 9,877 $(179) $(625) $24,916
=============================================================
Balance at December 31, 1996 $21 $16,161 $12,511 $(143) $(417) $28,133
Shares issued under stock incentive plans - 11 - - - 11
Net income for the three months ended
March 31, 1997 - - 879 - - 879
Change in unrealized gain (loss) on
securities available for sale, net - - - - (180) (180)
-------------------------------------------------------------
Balance at March 31, 1997 $21 $16,172 $13,390 $(143) $(597) $28,843
=============================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
PRIMARY BANK
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 879 $ 787
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 150 54
Amortization (accretion) of investment and mortgage-backed securities 12 (65)
Net amortization (accretion) of deferred loan fees 115 74
Depreciation and amortization expense 241 258
Net gain on sale of securities available for sale (4) (30)
(Gain) loss gain on sale of assets (2) 59
Decrease in accrued interest receivable 467 332
Increase in other assets (245) (1,117)
Increase (decrease) in accrued interest payable (35) 66
Decrease in accrued expenses and other liabilities (161) (186)
Net increase in advance payments by borrowers for taxes 367 274
-------------------
Net cash provided by operating activities 1,784 506
-------------------
Cash flows from investing activities:
Maturities and calls of investment securities held to maturity 5,000 4,000
Purchases of investment securities held to maturity (75) (21,218)
Sale of securities available for sale 12,870 2,072
Purchase of investment securities available for sale (23,207) (10,598)
Maturities and calls of securities available for sale - 5,949
Purchases of mortgage-backed securities held to maturity - (1,341)
Principal payments on investment and mortgage-backed
securities held to maturity 554 1,616
Principal payments on securities available for sale 2,990 879
Purchase of stock in the Federal Home Loan Bank of Boston (387) -
Sale of stock in the Federal Home Loan Bank of Boston - 1,343
Proceeds from sales of other real estate owned, net of loans granted 49 326
Net (increase) decrease in loans receivable (7,288) 4,631
Proceeds from sale of other assets 6 1,344
Purchase of banking premises and equipment (703) (84)
-------------------
Net cash used in investing activities (10,191) (11,081)
-------------------
</TABLE>
<PAGE> 4
PRIMARY BANK
STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 3,117 $ (5,829)
Decrease in repurchase agreements (5,874) (588)
Increase in borrowed funds 10,185 17,072
Issuance of common stock 11 16
--------------------
Net cash provided by financing activities 7,439 10,671
--------------------
Net (decrease) increase in cash and cash equivalents (968) 96
Cash and cash equivalents at beginning of period 12,430 11,040
--------------------
Cash and cash equivalents at end of period $ 11,462 $ 11,136
====================
Supplemental cash flow information:
Cash paid for the period for:
Interest on deposits and borrowed funds $ 4,066 $ 3,658
Supplemental disclosures of non-cash investing activities:
Loans transferred to real estate owned - 241
Loans charged-off, net 246 144
Loans granted on sales of other real estate owned 85 314
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
PRIMARY BANK
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements of Primary Bank (the "Bank"), have been
prepared in accordance with regulations of the Federal Deposit Insurance
Corporation (FDIC). Certain information required by Generally Accepted
Accounting Principles has been condensed or omitted pursuant to such rules
and regulations.
The financial statements for the three months ended March 31, 1997 and 1996
include all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation of results for
those interim periods. The results for the three months ended March 31,
1997 are not necessarily indicative of the results expected for the entire
year.
It is suggested that these interim unaudited financial statements be read in
conjunction with the audited financial statements of the Bank for the year
ended December 31, 1996.
(A) IMPAIRED LOANS
Commercial and commercial real estate loans are considered impaired when it
is probable that the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The amount of
impairment for all impaired loans is determined by the difference between
the present value of the expected cash flows related to the loan using the
original contractual interest rate and its recorded value, or, as a
practical expedient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the
loan. When foreclosure is probable, impairment is measured based on the
fair value of the collateral. Mortgage and consumer loans which are not
individually significant are measured for impairment collectively.
Loans are placed on non-accrual status when payment of principal or interest
is considered to be in doubt or is past due 90 days or more. Previously
accrued income that has not been collected is reversed from current income,
and subsequent cash receipts are applied to reduce the unpaid principal
balance.
At March 31, 1997, total impaired loans were $2.1 million and had a related
general allowance for loan losses of $337,000. During the period ended
March 31, 1997, the average recorded investment in net impaired loans was
$2.0 million with $8,000 of interest income being recognized on these loans
using the cash basis method of income recognition.
(B) EARNINGS PER SHARE
Earnings per share is calculated by dividing net income for the period by
the weighted average number of shares of common and common equivalent shares
outstanding during the period. Common equivalent shares include the
incremental shares issued under the treasury stock method for stock options
considered to be exercised. Common shares outstanding exclude uncommitted
ESOP shares and include committed ESOP shares. Earnings per share for
applicable periods, have been retroactively adjusted to reflect a 5% stock
dividend paid in January 1997.
<PAGE> 6
PRIMARY BANK
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
2. SECURITIES AVAILABLE FOR SALE
Securities available for sale at March 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 3,983 $ - $ (22) $ 3,961
Corporate and other 999 - (25) 974
U.S. Government agencies 14,499 1 (352) 14,148
Mortgage-backed securities:
Fannie Mae 33,709 49 (295) 33,463
Freddie Mac 22,771 37 (166) 22,642
Ginnie Mae 14,356 - (173) 14,183
-----------------------------------------
Total mortgage-backed securities $70,836 $ 86 $ (634) $70,288
Marketable equity securities 659 72 (30) 701
-----------------------------------------
Total securities available for sale $90,976 $159 $(1,063) $90,072
=========================================
</TABLE>
Securities available for sale at December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $12,999 $ 8 $(220) $12,787
Corporate and other 999 - (12) 987
Mortgage-backed securities:
Fannie Mae 33,284 59 (233) 33,110
Freddie Mac 32,402 39 (260) 32,181
Ginnie Mae 3,577 1 (69) 3,509
-----------------------------------------
Total mortgage-backed securities 69,263 99 (562) 68,800
Marketable equity securities 409 83 (27) 465
-----------------------------------------
Total securities available for sale $83,670 $190 $(821) $83,039
=========================================
</TABLE>
<PAGE> 7
PRIMARY BANK
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities at
March 31, 1997 and December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
-----------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $53,266 $ - $(1,260) $52,006
SBA Securities 916 11 (1) 926
Municipal obligations <F1> 484 - - 484
-----------------------------------------
Total investment securities $54,666 $11 $(1,261) $53,416
=========================================
<CAPTION>
December 31, 1996
-----------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------
(Dollars in Thousands)
----------------------
U.S. Government agencies $58,211 $105 $(493) $57,823
SBA Securities 1,011 11 (7) 1,015
Municipal obligations 421 - - 421
-----------------------------------------
Total investment securities $59,643 $116 (500) $59,259
=========================================
<FN>
<F1> Municipal obligations represent obligations of cities and towns in New
Hampshire and are not readily saleable.
</FN>
</TABLE>
4. MORTGAGE-BACKED SECURITIES:
The amortized cost and approximate fair value of mortgage-backed securities
at March 31, 1997 and December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
-----------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Fannie Mae $ 6,902 $ 19 $(219) $ 6,702
Freddie Mac 1,000 - (86) 914
Ginnie Mae 6,924 100 (171) 6,853
Other backed securities 387 - (12) 375
-----------------------------------------
Total mortgage-backed securities $15,213 $119 $(488) $14,844
=========================================
</TABLE>
<PAGE> 8
PRIMARY BANK
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, 1996
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Fannie Mae $ 7,030 $ 32 $(141) $ 6,921
Freddie Mac 1,000 - (99) 901
Ginnie Mae 7,227 112 (113) 7,226
Other backed securities 424 - (11) 413
-----------------------------------------
Total mortgage-backed securities $15,681 $144 $(364) $15,461
========================================
</TABLE>
5. LOANS, NET
The composition of the balances of loans at March 31, 1997 and December 31,
1996 is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C>
Residential - fixed rate $ 5,730 $ 5,559
Residential - variable rate 56,222 56,214
Construction 2,345 2,325
Commercial and Multifamily - fixed rate 28,521 27,960
Commercial and Multifamily - variable rate 61,379 59,922
Government guaranteed purchased loans 6,833 6,931
----------------------
Mortgage loans 161,030 158,911
Industrial revenue bonds (Municipal obligations) 3,035 894
Commercial - fixed rate 12,706 11,894
Commercial - variable rate 33,019 30,852
Home equity 11,968 11,989
Second mortgage 2,223 2,040
Installment 7,871 8,009
Government guaranteed purchased loans 10,697 10,948
----------------------
Other loans 81,519 76,626
----------------------
Total loans $242,549 $235,537
======================
</TABLE>
<PAGE> 9
PRIMARY BANK
NOTES TO FINANCIAL STATEMENTS
6. OTHER REAL ESTATE OWNED
The composition of this asset at March 31, 1997 and December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C>
Land $ 467 $ 506
One to four family residential 1,059 1,102
Commercial real estate 243 325
Multi-family real estate 110 110
--------------------
Total OREO $1,879 $2,043
Allowance for losses (33) (63)
--------------------
OREO, net $1,846 $1,980
====================
</TABLE>
7. DEPOSITS
Deposits at March 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C>
Savings $ 52,859 $ 51,036
Time certificates 156,292 155,128
Money market deposit accounts 25,168 25,915
NOW accounts 42,804 41,544
Demand deposits and official checks 31,084 31,467
----------------------
Total deposits $308,207 $305,090
======================
</TABLE>
8. BORROWED FUNDS
Borrowed funds at March 31, 1997 and December 31, 1996 include advances from
the Federal Home Loan Bank. Scheduled maturities and interest rates on such
advances are as follows:
<TABLE>
<CAPTION>
March 31, Range of December 31, Range of
1997 Rates 1996 Rates
-------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $62,634 5.39 - 7.03% $42,181 5.39 - 7.32%
Due from one to three years 6,050 4.69 - 6.31% 16,318 4.69 - 6.31%
------- -------
$68,684 $58,499
======= =======
</TABLE>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers,
and to reduce its exposure to fluctuations in interest rates. These
financial instruments include commitments to originate and purchase loans,
standby letters of credit, and undrawn lines of credit to local business and
individuals. The Bank uses its normal underwriting and credit criteria in
evaluating these commitments, and establishes appropriate reserves for these
commitments.
<PAGE> 10
PRIMARY BANK
NOTE TO FINANCIAL STATEMENTS
In the normal course of business, outstanding commitments not reflected in
the balance sheet as of the dates indicated were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C>
Home equity lines of credit $ 9,631 $ 9,485
Commitments to originate loans 7,586 9,323
Commercial business lines of credit 23,288 24,764
Standby letters of credit 903 554
Unadvanced portions of construction loans 921 1,079
</TABLE>
10. INCOME TAXES
A valuation allowance is provided when it is more likely than not that some
portion of the gross deferred tax asset will not be realized. Management
has established a valuation allowance principally for the effect of the
income tax benefit derived from the gross deductible temporary differences.
Management believes the existing net deductible temporary differences that
give rise to the net deferred income tax asset will reverse in periods the
Bank generates net taxable income. At March 31, 1997, the Bank would need
to generate approximately $6.3 million of future net taxable income to
realize the net deferred income tax asset. Management believes that it is
more likely than not that the net deferred income tax asset at March 31,
1997 will be realized based on the significant reduction in the level of
non-performing assets.
It should be noted, however, that factors beyond Management's control, such
as the general state of the economy and real estate values, can affect
future levels of taxable income and that no assurance can be given that
sufficient taxable income will be generated to fully absorb gross deductible
temporary differences.
As of December 31, 1996, the Bank has net operating loss carryforwards
available for federal tax purposes of $6.0 million. The subsequent
realization of $2.5 million of that amount, attributable to Horizon Bank and
Trust, is subject to limitation as set forth in Internal Revenue Code
Section 382 due to the change in ownership. The remaining $3.5 million may
be subject to significant limitation under the provisions of Section 382 in
the event of a future ownership change.
11. MERGER
On April 29, 1997 the Bank announced a definitive agreement under which
Granite State Bankshares Inc. will acquire Primary Bank through a merger.
The agreement provides that Stockholders of the Bank will receive in a tax
free exchange, shares of Granite State Bankshares common stock based on the
bid price of Granite common stock at 12:00 noon on April 29, 1997 of
$25.375. Each outstanding share of the Bank would be converted into .9951
shares of Granite State Bankshares common stock as defined by the exchange
ratio.
<PAGE> 11
PRIMARY BANK
NOTE TO FINANCIAL STATEMENTS
The exchange ratio for conversion of Primary common stock into Granite State
Bankshares common stock remains fixed until Granite's common stock is above
$27.278. Based upon Granite's common stock price ranging between $25.375
and $27.278, the value to Primary shareholders increases up to $27.14. If
the average bid price of Granite State Bankshares common stock for the
twenty trading days preceding the fifth day prior to the effective date of
the merger is above $27.278, the exchange ratio will float down from .9951
shares preserving $27.14 of value to Primary Shareholders. If the average
bid price of Granite common stock for such twenty day period is below
$25.375, the exchange ratio floats between .9951 and 1.2438 shares. Primary
may terminate the agreement if the average price of Granite common stock is
below $20.30 per share, unless Granite agrees to increase the exchange
ratio. The exchange ratios set forth above will be adjusted to reflect a 3
for 2 stock split of Granite common stock to be effective on May 9, 1997.
<PAGE> 12
PRIMARY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Primary Bank reported a net income of $879,000 or $.40 per share for the
quarter ended March 31, 1997. This compares with a net income of $787,000
or $.37 per share for the same period in 1996.
Net interest income increased $397,000 or 12.2% from $3.3 million to $3.7
million for the quarters ended March 31, 1996 and March 31, 1997,
respectively. Net interest margin has increased in each of the last four
quarters from 3.45% to 3.71% for the quarters ending June 30, 1996 and March
31, 1997, respectively. This was the result of both increased yields on
interest bearing assets and a $2.8 million reduction in non-performing
assets from $7.0 million at March 31, 1996 to $4.2 million at March 31,
1997.
Non-interest income increased $122,000 or 23.1% to $651,000 for the quarter
ended March 31, 1997 from $529,000 for the same quarter in 1996. This was
primarily the result of increased deposit fees. Included in non-interest
income was non-recurring income in 1997 of $6,000 and a non-recurring loss
of $29,000 in 1996 related primarily to the investment portfolio.
REGULATORY MATTERS
The Bank is in a heavily regulated industry. As a New Hampshire chartered
guaranty (stock) savings bank whose deposits are insured by the FDIC, the
Bank is subject to regulation by federal and state regulatory authorities
including, but not limited to, the FDIC and the New Hampshire Commissioner
of Banks.
The following table below sets forth the regulatory capital ratios of the
Bank at March 31, 1997, calculated in accordance with the capital
requirements. As the table demonstrates at March 31, 1997, the Bank's
capital exceeded all regulatory requirements.
<TABLE>
<CAPTION>
March 31, 1997
--------------
(Dollars in Thousands)
Regulatory
Actual Required Excess Actual Percentage
Capital Capital Amount Percent Required
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Leverage $29,386 $21,589 7,797 6.81% 5.00%
Risk based:
(i) Tier 1 (core)<F1> 29,386 9,765 19,621 12.04% 4.00%
(ii) Total 31,867 19,530 12,337 13.05% 8.00%
- --------------------
<FN>
<F1> The Bank's Tier 1 (core) capital is less than its GAAP capital based
upon the regulatory requirement to deduct intangible assets from GAAP
capital. At March 31, 1997, the Bank had intangible assets of $54,000,
which is the amortized premium paid for the purchase of the deposits of a
failed bank from the FDIC in 1991. The premium is being amortized over
seven years.
</FN>
</TABLE>
<PAGE> 13
PRIMARY BANK
INTEREST RATE SENSITIVITY
Interest rate risk management is conducted by the Bank as part of its
asset/liability and funds management process and is directed by an
Asset/Liability Management Committee. The primary objective of the Bank's
asset/liability management process is to manage liquidity, maximize net
interest income and return on capital within acceptable levels of risks.
Interest rate risk is analyzed in terms of the projected impact on net
income from potential short and long term changes in interest rates.
Interest rate risk management also seeks to ensure liquidity and capital
adequacy in various rate scenarios relative to regulatory and internal
guidelines.
The matching of assets and liabilities is analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income while a positive gap would tend to adversely affect in net
interest income. A sudden and significant increase in interest rates may
have an adverse impact on the ability of borrowers of the Bank to repay
their loans in accordance with the terms and may also lengthen the period of
time to dispose of other real estate owned. Currently, pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the
FDIC has proposed a policy statement and is developing regulations that will
include an interest rate risk component into the calculation of capital
ratios.
The Bank's net interest spread increased to 3.26% for the three months ended
March 31, 1997, compared to 3.23% for the same period in 1996. The Bank's
interest rate margin also increased to 3.71% for the three months ended
March 31, 1997, compared to 3.62% for the same period in 1996. The net
interest margin was negatively affected in the first quarter of 1996 by the
increase in prepayments of mortgage-backed securities and government
guaranteed loans. At March 31, 1997, the Bank's cumulative interest rate
sensitivity gap as a percentage of total assets at the one year horizon
stood at a negative 6.5% gap.
BALANCE SHEETS
Total assets of the Bank at March 31, 1997 were $435.7 million compared to
$427.4 million at December 31, 1996, representing an increase of 1.9%.
Investment securities, including available for sale and mortgage-backed
securities, increased by $1.6 million during the period to $160.0 million or
36.7% of total assets at March 31, 1997. Net loans increased by $7.1
million to $240.1 million or 3.1% during the period, representing 55.1% of
total assets at March 31, 1997.
Deposits increased by $3.1 million from $305.1 million at December 31, 1996
to $308.2 million at March 31, 1997. Repurchase agreements decreased $5.9
million to $27.6 million at March 31, 1997 while borrowings increased $10.2
million to $68.7 million for this same period. Total stockholders' equity
increased as earnings for the three months ended March 31, 1997 were
partially offset by the depreciation of certain securities in the available
for sale account after tax effects.
<PAGE> 14
PRIMARY BANK
NET INTEREST INCOME
Net interest income increased $397,000 or 12.2% from, $3.3 million to $3.7
million at March 31, 1996 and March 31, 1997, respectively. The interest
margin for the three months ended March 31, 1997 was 3.71% versus 3.62% for
the same period of 1996. As discussed above, the interest margin was
negatively affected in 1996 due to an increase in prepayments of mortgage-
backed securities and government guaranteed loans.
ACCOUNT SERVICE FEES AND OTHER NON-INTEREST INCOME
Total non-interest income for the three months ended March 31, 1997 was
$651,000, compared to $529,000 for the same period in 1996. The Bank had
non-recurring income of $6,000 and a non-recurring loss of $29,000 related
primarily to the investment portfolio for the quarter ended March 31, 1997
and 1996, respectively. Service fees on deposit accounts totaled $483,000
and $415,000 for the three months ended March 31, 1997 and 1996,
respectively.
NON-INTEREST EXPENSE - FOR THE QUARTER ENDED MARCH 31, 1997 COMPARED TO THE
QUARTER ENDED MARCH 31, 1996
Non-interest expenses increased by $331,000, or 11.2% from $3.0 million for
the first quarter of 1996 to $3.3 million for the same period of 1997.
Salaries and employee benefits increased $130,000 or 9.7% from $1.3 million
for the first quarter of 1996 to $1.5 million for the same period in 1997.
These increases are primarily due to the opening of a new branch in
Merrimack, NH in the first quarter of 1997, the hiring of additional loan
officers to originate commercial loans in our newer market areas, as well as
normal salary increases made during the year. Office occupancy expense
increased $3,000 to $324,000 in the first quarter of 1997.
Office expenses decreased $18,000 or 5.4% from $331,000 for the first
quarter of 1996 to $313,000 in the first quarter of 1997 due to a decrease
in depreciation expense as well as timing of certain expenses. Data
processing expenses increased $28,000 or 9.7% from $289,000 in 1996 to
$317,000 in 1997 as the Bank incurred additional costs related to such new
products as the automated telephone response system which was implemented in
the third quarter of 1996. These additional costs were partially offset by
a reduction in depreciation expense.
Professional service fees increased $91,000 or 111% from $82,000 in 1996 to
$173,000 in 1997 due to ongoing professional services related to audit,
compliance, regulatory as well as loan review. The Bank incurred costs
related to a cost efficiency study which was being performed for the Bank in
1997.
Marketing increased $24,000 or 16% from $150,000 in 1996 to $174,000 in 1997
due to timing of expenses as well as an introduction of the "Totally Free
Checking" program into the new Merrimack market. Other expenses increased
$86,000 or 20.8% from $414,000 in 1996 to $500,000 in 1997 due to an
increase in activity for ATM network charges; an increase in costs related
to shareholder information, and an increase in cost related to New
Hampshire Business Enterprise Tax.
PROVISION FOR INCOME TAXES
See Note 10.
<PAGE> 15
PRIMARY BANK
NET INCOME
Net income for the three months ended March 31, 1997 was $879,000 an
increase over net income of $787,000 for the same period in 1996.
LIQUIDITY
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash outflows from normal
depositor requirements and loans demands. The Bank's primary sources of
funds are deposits, loan amortization and prepayments, sales or maturities
or calls of securities, borrowing and income on earning assets. In
addition, the Bank maintains amounts invested in Federal funds sold and
interest bearing deposits, which can be immediately converted into cash, and
United States Treasury and Government Agency securities which can be sold or
pledged to raise funds.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1997 which are
anticipated by the Bank, based upon certain assumptions, to reprice or
mature in each of the future time periods shown. Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period was determined in accordance with the earlier of the term
to repricing or the contractual term of the asset or liability to maturity.
Management has assumed no prepayments of the Bank's fixed-rate loans. The
assumptions used may not be indicative of future withdrawals of deposits or
prepayments of loans. Management uses its judgement in classifying Savings,
NOW and Money Market accounts according to its expectation of their
respective sensitivities to market interest rate changes based on local
market conditions and historical experience.
<TABLE>
<CAPTION>
At March 31, 1997
-----------------------------------------------------------------------------------
(Dollars in Thousands)
----------------------
6 mths 6 mths to 1 yr. to 2 yrs to 3 yrs to 5 yrs to Over
or less 1 yr. 2 yrs. 3 yrs. 5 yrs. 10 yrs. 10 yrs. Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net $ 61,106 $ 43,614 $ 9,483 $ 11,767 $ 12,049 $ 8,747 $14,903 $161,669
Other loans, net 48,734 7,397 4,296 5,624 2,544 1,963 7,953 78,511
Investment securities
held to maturity 3,781 1,099 57 97 2,321 46,744 567 54,666
Securities available for sale 39,607 16,178 3,993 11,280 12,173 2,995 4,750 90,976
Mortgage-backed securities
held to maturity 3,000 3,000 6,000 3,213 - - - 15,213
FHLB stock 3,537 - - - - - - 3,537
-----------------------------------------------------------------------------------
Total interest-bearing assets $159,765 $ 71,288 $ 23,829 $ 31,981 $ 29,087 $60,449 $28,173 $404,572
Interest-bearing liabilities:
Savings accounts $ 28,481 $ - $ - $ - $ - $ - $24,378 $ 52,859
NOW accounts 6,434 - 18,185 - - 18,185 - 42,804
Money market accounts 25,168 - - - - - - 25,168
Certificates of deposit 62,467 45,539 23,978 14,166 7,655 2,487 - 156,292
Borrowing 76,552 14,739 4,945 - - - - 96,236
-----------------------------------------------------------------------------------
Total interest-bearing liabilities $199,102 $ 60,278 $ 47,108 $ 14,166 $ 7,655 $20,672 $24,378 $373,359
Interest sensitivity gap per period $(39,337) $ 11,010 $(23,279) $ 17,815 $ 21,432 $39,777 $ 3,795 $ 31,213
-----------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(39,337) $(28,327) $(51,606) $(33,791) $(12,359) $27,418 $31,213
------------------------------------------------------------------------
Cumulative interest sensitivity as a
percentage of total assets (9.03%) (6.50%) (11.84%) (7.76%) (2.84%) 6.29% 7.16% 7.16%
-----------------------------------------------------------------------------------
Cumulative net interest-earning assets
as a percentage of interest-bearing
liabilities 80.24% 89.08% 83.16% 89.46% 96.24% 107.86% 108.36% 108.36%
-----------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
PRIMARY BANK
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
Net interest income represents the difference between income on interest-
bearing assets and expenses on interest-bearing liabilities. Net interest
income depends upon the volume of interest-earning assets and interest-
bearing liabilities and the interest rates earned or paid on them. The
Bank's average yield on earning assets decreased slightly from 7.73% during
the first quarter of 1996 to 7.68% during the first quarter of 1997. The
Bank's average rate paid on interest-bearing liabilities decreased from
4.51% during the first quarter of 1996 to 4.42% during the first quarter of
1997.
Interest income increased by $704,000 over the quarter ending March 31, 1996
to $7.7 million at March 31, 1997 while interest expense increased $307,000
to $4.0 million.
Net interest income for the three months ended March 31, 1997 totalled $3.7
million and reflected an increase of more than $397,000 or 12.2% as compared
with the same period in 1996. This increase in net interest income is
attributable to an increased level of average interest-earning assets and
average interest-bearing liabilities of $39.1 million and $38.6 million,
respectively. The net interest margin increased from 3.62% in the first
quarter of 1996 to 3.71% in the first quarter of 1997 partially due to 1996
being negatively affected by prepayments for mortgage-backed securities and
government guaranteed loans.
<PAGE> 17
PRIMARY BANK
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------
1997 1996
-------------------------- -------------------------
Average Yield Average Yield
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Assets
Interest-earning assets:
Mortgage loans, net <F1> $157,441 $ 3,290 8.36% $142,742 $3,014 8.45%
Other loans, net <F1> 81,228 1,823 9.10% 88,578 1,980 8.97%
Investment securities held to maturity
and securities available for sale 142,209 2,257 6.35% 108,353 1,699 6.27%
Mortgage-backed securities
held to maturity 15,497 259 6.69% 15,936 214 5.37%
FHLB Stock 3,420 54 6.40% 4,170 59 5.68%
Federal funds and interest-
bearing deposits 562 7 5.05% 1,500 20 5.35%
-------- ------- ----- -------- ------ -----
Total interest-earning assets 400,357 7,690 7.68% 361,279 6,986 7.73%
------- ----- ------ -----
Total assets 28,481 24,775
-------- --------
$428,838 $386,054
======== ========
Average liabilities and
retained earnings
Interest-bearing liabilities:
Savings accounts $ 52,256 $ 316 2.45% $ 51,509 $ 316 2.46%
Money Market and NOW accounts 65,988 299 1.84% 63,092 308 1.96%
Certificate accounts 156,589 2,149 5.57% 154,076 2,245 5.84%
Borrowed funds 95,113 1,267 5.40% 62,642 855 5.47%
-------- ------- ----- -------- ------ -----
Total interest-bearing liabilities 369,946 4,031 4.42% 331,319 3,724 4.51%
------- ----- ------ -----
Non-interest-bearing liabilities 30,294 29,685
-------- --------
Total liabilities 400,240 361,004
Stockholders' equity 28,598 25,050
-------- --------
Total liabilities and stockholders' equity $428,838 $386,054
======== ========
Net interest income/interest rate spread <F2> $ 3,659 3.26% $3,262 3.23%
======= ===== ====== =====
Net interest-earning assets/
net interest margin <F3> $ 30,411 3.71% $ 29,960 3.62%
======== ===== ======== =====
Interest-earning assets
to interest-bearing liabilities 108.22% 109.04%
======= =======
- --------------------
<FN>
<F1> Includes non-accrual loans
<F2> Interest rate spread represents the difference between the average rate
on interest-earning assets and the average cost of interest-bearing
liabilities.
<F3> Net interest margin represents net interest income before the provision
for loan losses divided by average interest-earning assets.
</FN>
</TABLE>
<PAGE> 18
PRIMARY BANK
RATE/VOLUME ANALYSIS
For the three months ended March 31, 1997, interest income was $7.7 million,
an increase of $704,000 compared to the same period in 1996. This increase
is primarily attributable to (1) an increase due to volume of $126,000 in
the loan portfolio, and (2) an increase due to volume of $536,000 in the
investment securities held to maturity and securities available for sale.
Interest expense for the three months ended March 31, 1997 increased by
$307,000 to $4.0 million. Borrowings and certificate of deposits increased
due to volume by $424,000 and $29,000 respectively, while rates decreased by
$12,000 and $125,000, respectively. The increase in volume for borrowings
was used to fund the purchase of investment securities. Total net interest
income increased for the three months ended March 31, 1997 by $397,000. The
effect on net interest income is a result of changes in interest rates and
in the volume of earning assets and interest bearing liabilities as shown in
the following table.
Information is provided on changes attributable to (1) changes in volume
(change in average balance multiplied by prior period yield), (2) change in
rate (changes in yield multiplied by prior period average balance).
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 vs. 1996
----------------------------------
Changes Due to Increase (Decrease)
----------------------------------
(Dollars in Thousands)
----------------------------------
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Interest Income
Mortgage loans $ 308 $ (32) $ 276
Other loans (182) 25 (157)
Investment securities held to maturity
and securities available for sale 536 22 558
Mortgage-backed securities
held to maturity (6) 51 45
FHLB Stock (12) 7 (5)
Federal funds and interest-bearing
deposits (12) (1) (13)
---------------------------------
Net change in income on interest-
earning assets $ 632 $ 72 $ 704
Interest Expense
Savings accounts $ (2) $ 2 $ -
Money market and NOW accounts (12) 21 9
Certificate accounts (29) 125 96
Borrowed funds (424) 12 (412)
---------------------------------
Net change in expense on interest-
bearing liabilities (467) 160 (307)
---------------------------------
Net change in interest income $ 165 $ 232 $ 397
=================================
</TABLE>
<PAGE> 19
PRIMARY BANK
PROVISION FOR LOAN LOSSES
The allowance for loan losses represents amounts available to absorb future
loan losses. The level of the allowance is based on Management's assessment
of the degree of risk associated with the number and type of loans in the
loan portfolio. Management uses a number of tools to determine the
appropriate level of the allowance, including an internal loan grading
system, outside appraisals of real estate loans, external loan review, and
historical loss experience of certain types of loans. The allowance is
reviewed monthly by the Board of Directors of the Bank, although there can
be no assurance that the provision for loan losses will be adequate.
The provision for loan losses for the three months ended March 31, 1997 was
$150,000 compared to $54,000 for the same period in 1996. Total non-
performing loans increased by $305,000 from $2.1 million at December 31,
1996 to $2.4 million at March 31, 1997. The allowance at March 31, 1997 and
December 31, 1996 as a percentage of non-performing loans was 104.73% and
124.85%, respectively. Total non-performing assets were $4.2 million at
March 31, 1997, compared with $4.0 million at December 31, 1996 and $7.0
million at March 31, 1996. At March 31, 1997, non-performing assets were
.97% of total assets, compared to .95% at December 31, 1996 and 1.77% at
March 31, 1996.
A summary of the transactions in the allowance for loan losses is as
follows: (see Note 1)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Year ended Ended
March 31, December 31, March 31,
1997 1996 1996
-----------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $2,577 $ 3,447 $3,447
Provision charged to operations 150 722 54
Recoveries 18 235 95
Net realized losses charged to allowance (264) (1,827) (239)
-----------------------------------
Balance at end of period $2,481 $ 2,577 $3,357
===================================
</TABLE>
The following table represents information regarding non-performing loans
and assets. (See Note 1)
<TABLE>
<CAPTION>
At At At
March 31, December 31, March 31,
1997 1996 1996
--------------------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C>
Loans on non-accrual
Mortgage loans $2,192 $ 1,873 $4,908
Other loans 177 191 374
-----------------------------------
Total non-performing loans<F1> $2,369 $ 2,064 $5,282
-----------------------------------
Other real estate owned 1,846 1,980 1,689
-----------------------------------
Total non-performing assets $4,215 $ 4,044 6,971
===================================
</TABLE>
<PAGE> 20
PRIMARY BANK
<TABLE>
<CAPTION>
At At At
March 31, December 31, March 31,
1997 1996 1996
--------------------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C>
Non-performing loans as % of
total gross loans .98% .88% 2.33%
Non-performing assets as % of
total assets .97% .95% 1.77%
- --------------------
<FN>
<F1> Loans are placed in non-accrual status when they become contractually
past due 90 days or more, or there is doubt as to the full and timely
payment of principal and interest. Once a loan is placed on non-accrual
status, previously accrued but unpaid interest is reversed in the current
period against interest income. Interest accrued is resumed only when
Management analysis determines that the loans are fully collectible as to
principal and interest.
</FN>
</TABLE>
<PAGE> 21
PRIMARY BANK
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Bank has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PRIMARY BANK
Date: May 15, 1997 /s/ Christopher J. Flynn
----------------------------- ------------------------------
Christopher J. Flynn
President & Chief Executive Officer
PRIMARY BANK
Date: May 15, 1997 /s/ Michael J. Janosco, Jr.
----------------------------- ------------------------------
Michael J. Janosco, Jr.
Senior Vice President &
Chief Financial Officer
<PAGE> 22
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM F-3
CURRENT REPORT
Under Section 13 of the
Securities Exchange Act of 1934
FOR THE MONTH OF APRIL, 1997
PRIMARY BANK
(Exact name of bank as specified in charter)
35 MAIN STREET, PETERBOROUGH, NEW HAMPSHIRE 03458
(Address of principal offices)
(603) 924-7142
(Bank's telephone number, including area code)
The Exhibit Index appears on page 6.
<PAGE> 1
ITEM 12 - OTHER MATERIALLY IMPORTANT EVENTS
On April 29, 1997, Primary Bank ("Primary Bank"), a New Hampshire
guaranty (stock) savings bank, Granite Bank ("Granite Bank"), a New
Hampshire bank and Granite State BankShares, Inc. ("Granite State"), a New
Hampshire corporation, a registered bank holding company under the Bank
Holding Company Act of 1956, as amended, and parent corporation of Granite
Bank, announced the execution of an Agreement and Plan of Reorganization and
an Agreement and Plan of Merger, each dated as of April 29, 1997
(collectively, the "Merger Agreements"), pursuant to which Primary Bank will
be merged with and into Granite Bank (the "Merger"), with Granite Bank as
the surviving bank. The description of the terms of the Merger Agreements
set forth herein is subject to and qualified in its entirety by the terms of
the Merger Agreements attached as Exhibit A hereto.
Pursuant to the terms of the Merger Agreements, each share of common
stock of Primary Bank, par value $0.01 per share (the "Primary Bank Common
Stock") issued and outstanding immediately prior to the effective time of
the Merger (except for shares held by Granite Bank, Granite State or any
dissenting Primary Bank shareholders) will be entitled to receive Merger
consideration payable in shares of common stock of Granite State, $1.00 par
value per share ("Granite State Common Stock"). The Merger consideration
will be based on the average closing bid price per share of Granite State
Common Stock during the twenty (20) trading day period ending on the fifth
business day immediately preceding the effective date of the Merger (the
"Granite State Market Value"). The exchange ratio will be equal to the
quotient of $25.25 divided by the Granite State Market Value rounded to the
nearest ten-thousandth (the "Exchange Ratio"), subject to following the
maximum and minimum collars:
(i) if the Granite State Market Value is less than $20.30, then
Primary Bank shall receive an Exchange Ratio equal to $25.25
divided by $20.30 or the unilateral right to terminate the
Merger Agreement;
(ii) if the Granite State Market Value is greater than or equal to
$20.30, but less than or equal to $25.375, then Primary Bank
shall receive an Exchange Ratio equal to $25.25 divided by the
Granite State Market Value;
(iii) if the Granite State Market Value is greater than $25.375, but
less than or equal to $27.278, then Primary Bank shall receive
an Exchange Ratio equal to $25.25 divided by $25.375; and
(iv) if the Granite State Market Value is greater than $27.278, then
Primary Bank shall receive an Exchange Ratio equal to $27.278
divided by the Granite State Market Value.
In addition to termination provisions customary in transactions of
this nature, the Primary Bank Board of Directors has the ability to
terminate
the Merger Agreements (i) if and after Primary Bank enters into an agreement
relating to a bona fide Acquisition Proposal (as defined in the Agreement
and
Plan of Reorganization) that the Primary Bank Board of Directors determined
in good faith after receiving the advice of Primary Bank's counsel and
financial advisor to be more favorable to the Primary Bank stockholders than
the Merger (a "Superior Acquisition Proposal"), and (ii) following the vote
of the Primary Bank Board of Directors to withdraw, change or modify its
recommendation of approval of the Merger to the Primary Bank stockholders
after having consulted with and considered
<PAGE> 2
the written advice of Primary Bank's counsel that there is a reasonable
basis to conclude that the making of such recommendation would constitute a
breach of fiduciary duties of such directors under New Hampshire law.
The consummation of the Merger by the parties is subject to certain
conditions, including approval by the shareholders of Primary Bank, receipt
of necessary regulatory approvals from appropriate federal and state
regulatory authorities and certain other conditions customary in
transactions
of this nature. The Merger Agreements are attached hereto as Exhibit A and
are incorporated herein by reference. The press release issued by Primary
Bank
in connection with the execution of the Merger Agreements is attached hereto
as Exhibit B and is incorporated herein by reference.
Simultaneously with the parties' execution and delivery of the Merger
Agreements, Primary Bank and Granite State entered into a Stock Option
Agreement dated as of April 29, 1997 (the "Option Agreement"), pursuant to
which Primary Bank granted to Granite State an option (the "Option") to
purchase up to 12.9% of the outstanding Primary Bank Common Stock before
giving effect to the exercise of the Option at a price of $22.75 per share,
subject to adjustment (the "Option Price"). The Option is exercisable upon
the occurrence of certain events described in the Option Agreement. In the
event Primary Bank enters into a Superior Acquisition Proposal, the total
number of shares of Primary Bank Common Stock issuable under the Option
Agreement shall be reduced so that the aggregate dollar value of the
difference between (x) the aggregate Option Price to be paid by Granite
State and (y) the aggregate Applicable Price (as defined in the Option
Agreement) shall not exceed $2.5 million. The Option was granted by Primary
Bank as a condition of and in consideration for Granite State's entering
into the Merger Agreements. The Stock Option is attached hereto as Exhibit C
and is incorporated herein by reference.
<PAGE> 3
ITEM 13 - FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired Not Applicable
(b) Exhibits
A. Agreement and Plan of Reorganization and
Agreement and Plan of Merger each among
Primary Bank, Granite Bank and Granite
State BankShares, Inc., and dated as of
April 29, 1997
B. Press Release dated April 29, 1997
C. Stock Option Agreement between Primary
Bank and Granite State BankShares, Inc.,
dated as of April 29, 1997
<PAGE> 4
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the
bank has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PRIMARY BANK
Date: May 8, 1997 By: /s/ Christopher J. Flynn
Christopher J. Flynn
President and Chief Executive
Officer
<PAGE> 5
EXHIBIT INDEX
Exhibit
- -------
A. Agreement and Plan of Reorganization and Agreement and Plan of
Merger each among Primary Bank, Granite Bank and Granite State
BankShares, Inc. dated as of April 29, 1997
B. Press release dated April 29, 1997
C. Stock Option Agreement between Primary Bank and Granite State
BankShares, Inc., dated as of April 29, 1997
<PAGE> 6
EXHIBIT B
[Primary Bank Letterhead]
GRANITE STATE BANKSHARES, INC.
TO ACQUIRE PRIMARY BANK
THROUGH MERGER
Keene, N.H., April 29, 1997--Granite State Bankshares, Inc.
("Granite") (NASDAQ: GSBI), headquartered in Keene, New Hampshire and
Primary Bank ("Primary") (NASDAQ: PETE), headquartered in Peterborough, New
Hampshire, jointly announced today that they have signed a definitive
agreement under which Granite will acquire Primary through a merger.
In connection with the acquisition, Primary will be merged into
Granite's banking subsidiary, Granite Bank. The combination of these two
banks will result in Granite Bank's position as the second largest
independent banking enterprise headquartered in New Hampshire and the
largest independent commercial banking franchise in the state. Upon
completion of the acquisition of Primary, Granite will have $807 million in
assets, shareholders' equity of over $60 million and 18 full service banking
offices (with a new branch expected to open in Nashua in the Summer of
1997).
Pursuant to the definitive agreement and based on the bid price of
Granite common stock at 12:00 noon on April 29, 1997 of $25.375, each
outstanding share of Primary would be converted into .9951 shares of Granite
State Bankshares common stock, subject to adjustment based on the bid price
of Granite State Bankshares common stock prior to closing.
Based on an exchange ratio of .9951 and on the bid price of Granite
common stock at 12:00 noon on April 29, 1997 of $25.375, the indicated value
of the transaction would be $25.25 per Primary share, for a total aggregate
consideration of approximately $57.8 million. The agreement also provides
Granite with an option to acquire up to 12.9% of the outstanding shares of
Primary common stock under certain circumstances.
In announcing the transaction, Charles W. Smith, President and Chief
Executive Officer of Granite stated, "I am pleased that we are able to
significantly expand the Granite franchise through this in-market
acquisition. We are particularly excited about the prospects of entering
the Concord market and the opportunity to accelerate Primary's earnings
momentum by leveraging Granite's operating efficiencies and broadening the
products and services now offered by each respective company. The more
recent emphasis placed on Commercial and Industrial lending by Primary is
expected to complement Granite's small business lending expertise."
"We anticipate approximately 35% ($4.5 million pre-tax) expense
savings resulting from consolidated opportunities, and that after certain
balance sheet restructuring initiatives, the transaction will be accretive
to both earnings per share and book value per share in the first full year,
making the acquisition beneficial to shareholders of both Granite and
Primary. Upon consummation of the merger it is expected that Granite will
take a special charge to earnings of approximately $4.4 million for one-time
costs of the transaction."
Mr. Smith added, "I am also pleased to announce that Christopher J.
Flynn, President and Chief Executive of Primary will become the President of
Granite Bank. Chris' strong banking background and deep roots in the
community will help us build our franchise and is a great addition to the
Company's overall management team."
Mr. Flynn stated, "The combination of Primary Bank and Granite Bank
creates a New Hampshire banking company with a strong geographic presence in
the most dynamic banking markets in the state. It brings together two New
Hampshire banking companies that trace their roots back to the 1800's. The
merger of our two companies represents an excellent opportunity to enhance
shareholder value, deliver more services to our customers and join two
institutions with similar community-based philosophies. The opportunity to
join forces with a strong local commercial bank represents a unique
opportunity for our shareholders, employees and customers. I am
particularly pleased to be able to offer Granite Bank's extensive array of
mortgage banking services to our customer base."
The exchange ratio for conversion of Primary common stock into Granite
State Bankshares common stock remains fixed until Granite's common stock is
above $27.28. If the average bid price of Granite State Bankshares common
stock for the twenty trading days preceding the fifth day prior to the
effective date of the merger is above $27.28, the exchange ratio will float
down from 1.000 share. If the average bid price of Granite common stock for
such twenty day period is below $25.375, the exchange ratio floats between
.9951 and 1.2438 shares. Primary may terminate the agreement if the average
price of Granite common stock is below $20.30 per share, unless Granite
agrees to increase the exchange ratio. The exchange ratios set forth above
will be adjusted to reflect a 3 for 2 stock split of Granite common stock to
be effective on May 9, 1997.
Three Primary Directors will join the Granite Board and four will
become Directors of Granite Bank. The transaction is intended to be tax
free to the shareholders of Primary and is subject to regulatory approval
and the approval of both Granite's and Primary's shareholders. It is
anticipated that the transactions will be accounted for under the pooling-
of-interests method of accounting. The transaction is expected to be
completed in the fourth quarter of 1997.
As of March 31, 1997, Primary had total assets of approximately $430
million, ten branches located in Merrimack, Hillsborough and Cheshire
Counties, and an extensive distribution of ATM locations throughout Southern
New Hampshire.
REVOCABLE PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
GRANITE STATE BANKSHARES, INC.
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
FOR A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 23, 1997
The undersigned stockholder of Granite State Bankshares, Inc. (Granite
State) hereby appoints the Board of Directors, with full powers of
substitution, as attorneys-in-fact and agents for and in the name of the
undersigned, to vote at the Special Meeting of Stockholders of Granite State
to be held on September 23, 1997, at The Keene Country Club, West Hill Road,
Keene, New Hampshire, at 10:00 a.m. local time, and at any and all
adjournments thereof. The Board of Directors is authorized to cast all
votes to which the undersigned is entitled as follows:
The approval of the Agreement and Plan of Reorganization as amended (the
"Reorganization Agreement") dated as of April 29, 1997, among Granite State
and its wholly owned subsidiary, Granite Bank, and Primary Bank, a New
Hampshire chartered guaranty (stock) savings bank, and a related Agreement
and Plan of Merger (the "Plan of Merger," and together with the
Reorganization Agreement, the "Agreement") between Primary Bank and Granite
Bank and joined in by Granite State, a copy of each of which is included as
Appendix A to the accompanying Joint Proxy Statement and incorporated by
reference herein pursuant to which:(i) each outstanding share of common
stock of Primary Bank, par value $.01 per share (except as otherwise
provided in the agreement), would be converted into a number of shares of
Granite State common stock, par value $1.00 per share ("Granite State Common
Stock"), determined in accordance with the terms of the Agreement, and cash
in lieu of any fractional share, resulting in the issuance of up to
4,558,854 shares of Granite State Common Stock in connection with the
proposed Merger.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY THE BOARD OF
DIRECTORS IN ITS BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS
KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
Votes will be cast in accordance with the Proxy. Should be the undersigned
be present and elect to vote at the Special Meeting or adjournment thereof
and after notification to the Secretary of Granite State at said meeting of
the stockholder's decision to terminate this Proxy, then the power of said
attorney-in-fact or agents shall be deemed terminated and of no further
force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of
Stockholders and a Proxy Statement dated August 8, 1997, prior to the
execution of this Proxy.
NOTE: Only one signature is required in the case of a joint account.
---------------------------
Please be sure to sign and date | Date |
this Proxy in the box below. | |
-------------------------------------------------------------------------
| |
| |
-----Stockholder sign above-----------Co-holder (if any) sign above------
- ---------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
GRANITE STATE BANKSHARES, INC.
----------------------------------------------------------------------------
| PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED |
| ENVELOPE. |
----------------------------------------------------------------------------
REVOCABLE PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
PRIMARY BANK
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
FOR A SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON SEPTEMBER 24, 1997
The undersigned stockholder of Primary Bank ("Primary Bank") hereby appoints
Charles P. Monaghan and Bruce D. Clow as Proxies of the undersigned, with
full powers of substitution, to vote such votes as the undersigned may be
entitled to vote at the Special Meeting of Stockholders of Primary Bank to
be held on September 24, 1997, at Monadnock Country Club, 49 High Street,
Peterborough, New Hampshire, at 11:00 a.m., local time, and at any and all
adjournments thereof. The Proxies are authorized to cast all votes to which
the undersigned is entitled as herein directed with respect to the
following:
The approval of the Agreement and Plan of Reorganization as amended (the
"Reorganization Agreement") dated as of April 29, 1997, among Granite State
Bankshares, Inc. ("Granite State") and its wholly owned subsidiary, Granite
Bank, and Primary Bank, a New Hampshire chartered guaranty (stock) savings
bank, and a related Agreement and Plan of Merger as amended (the "Plan of
Merger," and together with the Reorganization Agreement, the "Agreement")
between Primary Bank and Granite Bank and joined in by Granite State, a copy
of each of which is included as Appendix A to the accompanying Joint Proxy
Statement and incorporated by reference herein, pursuant to which: (i)
Primary Bank would be merged with and into Granite Bank (the "Merger"); and
(ii) each outstanding share of common stock of Primary Bank, par value $.01
per share (except as otherwise provided in the Agreement), would be
converted into a number of shares of Granite State common stock, par value
$1.00 per share ("Granite State Common Stock"), determined in accordance
with the terms of the Agreement, and cash in lieu of any fractional share.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY THE PROXIES IN
THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
Votes will be cast in accordance with the Proxy. Should the undersigned be
present and elect to vote at the Special Meeting or adjournment thereof and
after notification to the Secretary of Primary Bank at said meeting of the
stockholder's decision to terminate this Proxy, then the power of said
Proxies shall be deemed terminated and of no further force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of
Stockholders and a Proxy Statement dated August 8, 1997, prior to execution
of this Proxy.
NOTE: Only one signature is required in the case of a joint account.
---------------------------
Please be sure to sign and date | Date |
this Proxy in the box below. | |
-------------------------------------------------------------------------
| |
| |
-----Stockholder sign above-----------Co-holder (if any) sign above------
- -----------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
PRIMARY BANK
----------------------------------------------------------------------------
| PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED |
| ENVELOPE. |
----------------------------------------------------------------------------
