SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 0-14895
DECEMBER 31, 1996
GRANITE STATE BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE
(State or other jurisdiction of incorporation or organization)
02-0399222
(I.R.S. Employer Identification No.)
122 WEST STREET, KEENE, NEW HAMPSHIRE 03431
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (603) 352-1600
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK,
$1.00 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained to the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. (X)
Issuer's revenues for its fiscal year ended December 31, 1996
were $28,731,000.
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant, based on the closing bid price of
March 17, 1997, was $40,846,493. For purposes of this calculation,
the affiliates of the Registrant include its directors and
executive officers. Although such directors and executive officers
of the Registrant performing policy-making functions were assumed
to be "affiliates" of the Registrant, this classification is not to
be interpreted as an admission of such status.
As of March 17, 1997, the number of shares of the Registrant's
common stock outstanding of record (exclusive of treasury shares)
was 2,019,016.
<PAGE> 1
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated Part of the Annual
Report on Form 10-KSB:
Document Part
- -------- ----
Annual Report to Stockholders for Part I, Item 1 (c) (5),
the year ended December 31, 1996 "Statistical Information"
Part II, Item 6,
"Management's Discussion and
Analysis or Plan of Operation"
Part II, Item 7,
"Financial Statements"
Proxy Statement for the 1997 Part III, Item 9,
Annual Meeting of Stockholders "Directors, Executive Officers
Promoters and Control Persons,
Compliance with Section 16(a)
of the Exchange Act
Part III, Item 10,
"Executive Compensation"
Part III, Item 11,
"Security Ownership of Certain
Beneficial Owners and
Management"
Part III, Item 12,
"Certain Relationships and
Related Transactions"
<PAGE> 2
FORM 10-KSB ANNUAL REPORT -- TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 5
a. General Development of Business 5
b. Financial Information About Industry Segments 5
c. Narrative Description of Business 5
1. General Description of Business 5
2. Regulation & Supervision 6
3. Monetary Policies 10
4. Employees 11
5. Statistical Information 11
A. Distribution of Assets, Liabilities, and
Stockholders' Equity; Interest Rates
and Interest Differential 11
B. Rate/Volume Analysis 11
C. Investment Portfolio 11
D. Loan Portfolio 14
E. Maturity of Loans 14
F. Nonperforming Loans and Assets 15
G. Summary of Loan Loss Experience and
Allocation of the Allowance for Possible
Loan Losses 16
H. Risks Associated with Commercial Real Estate,
Commercial and Construction Loans 19
I. Deposits 19
J. Maturities of Time Deposits 20
K. Return on Equity and Assets 20
L. Borrowings 20
M. Competition 21
N. Subsidiaries 21
d. Financial Information About Foreign and Domestic Operations
and Export Sales 21
Item 2. Description of Property 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Additional Item Executive Officers 23
<PAGE> 3
PART II
Page
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 24
a. Market Information 24
b. Holders 24
c. Dividends 24
Item 6. Management's Discussion and Analysis or Plan of Operation 25
Item 7. Financial Statements 25
a. Financial Statements Required by Regulation S-X 25
b. Supplementary Financial Information 25
1. Selected Quarterly Financial Data 25
2. Information on the Effects of Changing Prices 25
3. Information About Oil and Gas Producing Activities 25
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act 26
Item 10. Executive Compensation 26
Item 11. Security Ownership of Certain Beneficial Owners and Management 26
Item 12. Certain Relationships and Related Transactions 26
Item 13. Exhibits and Reports on Form 8-K 26
a. List of Documents filed as Part of this Report 26
1. Financial Statements 26
2. Financial Statement Schedules 27
b. Reports on Form 8-K 27
c. Exhibits 28
Signatures 29
<PAGE> 4
PART I
Item 1. Description of Business
(a) General Development of Business
Granite State Bankshares, Inc. ("Granite State" or "Company") is
a single-bank holding company which was formed in 1986 to acquire
all of the stock of the Granite Bank, formerly Granite Bank of
Keene and Keene Savings Bank, upon its conversion from a mutual
savings bank to a state-chartered guaranty (stock) savings bank.
Since that time, the Company has acquired the Durham Trust Company,
First Northern Co-operative Bank, First National Bank of
Peterborough, and the Granite Bank of Amherst.
In March of 1987, Granite State organized a mortgage corporation,
GSBI Mortgage Corporation, for purposes of expanding the
residential loan programs it could offer, as well as improving the
efficiency and effectiveness of its participation in the secondary
mortgage markets. The mortgage corporation now operates as a
division of Granite Bank and services Cheshire, Hillsborough,
Strafford, and Rockingham counties, New Hampshire, with a wide
variety of mortgage loan products.
In July of 1987, the Granite Bank of Amherst opened for business
as a state-chartered guaranty (stock) savings bank, and was the
result of the purchase from the Amoskeag Bank of their Amherst
branch office. In June of 1989 it was merged into the First
National Bank of Peterborough under the name of Granite Bank, N.A.
In March of 1990 Granite Bank, N.A. was merged into Granite Bank.
In October of 1988, First Peterborough Bank Corp. was merged into
Granite State, leaving Granite State with the First National Bank
of Peterborough ("First National"). First National was a national
bank engaged in substantially all of the business operations
customarily conducted by a commercial bank in New Hampshire. In
June of 1989 the name was changed to Granite Bank, N.A., when it
absorbed Granite Bank of Amherst. In March of 1990, Granite Bank,
N.A. was merged into Granite Bank.
In August of 1991, Granite Bank entered into a purchase and
assumption agreement with the Resolution Trust Company ("RTC"),
whereby it acquired certain assets and assumed certain liabilities
of First Northern Co-operative Bank ("First Northern"),
headquartered in Keene, New Hampshire, which was under RTC
conservatorship.
In November of 1991, Granite Bank entered into a purchase and
assumption agreement with the Federal Deposit Insurance Corporation
("FDIC"), whereby it acquired certain assets and assumed certain
liabilities of Durham Trust Company ("Durham"), headquartered in
Durham, New Hampshire. The FDIC was the liquidating agent of
Durham Trust Company.
Granite Bank completed its conversion from a state-chartered
guaranty (stock) savings bank to a New Hampshire state-chartered
commercial bank during 1991.
(b) Financial Information about Industry Segments
Not applicable.
(c) Narrative Description of Business
(1) General Description of Business
Granite State operates as a bank holding company by virtue of its
ownership of 100% of the stock of Granite Bank (referred to as the
"Bank"). Currently, the Company does not transact any significant
business other than through the Bank.
<PAGE> 5
The principal business of the Bank is attracting deposits and
originating commercial loans and loans secured by first and second
mortgage liens on real estate located in New Hampshire.
In recent years, the Bank has concentrated its efforts on
expanding its franchise through increased emphasis on commercial
real estate loans and the introduction of new deposit products.
The Company has, and continues to devote considerable resources
toward the enhancement of computer systems and operating procedures
to position itself to compete effectively in its local markets.
The Bank offers a wide range of consumer and commercial services,
including: commercial demand deposits, consumer regular and
interest-bearing (NOW) checking and regular savings accounts;
certificates of deposit; residential and commercial real estate
loans; secured and unsecured consumer and commercial loans; and
cash management services.
The Company's distribution network for its services is comprised
of its main office in Keene, full-service banking offices in
Portsmouth, Durham, Peterborough, Amherst, Milford and Chesterfield
and 23 automatic teller machines ("ATMs") located in Chesterfield,
Keene, Swanzey, Peterborough, Amherst, Milford, Durham and
Portsmouth.
(2) Regulation and Supervision
General
- -------
Granite State is a registered bank holding company under the Bank
Holding Company Act of 1956 ("BHCA"), and as such, is subject to
regulation by the Federal Reserve Board ("FRB"). Granite Bank is a
New Hampshire-chartered commercial bank, the deposit accounts of
which are insured by the FDIC. As such, it is subject to the
regulation, supervision and examination of the New Hampshire Bank
Commissioner ("Commissioner") and the FDIC. See "New Hampshire
Law" and "Insurance of Deposits". It is a member of the Federal
Home Loan Bank of Boston ("FHLB").
New Hampshire Law
- -----------------
As a New Hampshire-chartered commercial bank, Granite Bank is
subject to the applicable provisions of state law and the
regulations adopted thereunder by the Commissioner. Granite Bank
derives its lending and investment powers from New Hampshire law
and is subject to periodic examination by and reporting
requirements of the Commissioner, who also has specific statutory
jurisdiction over certain banking activities, mergers and the
creation of new powers. The Commissioner has authority to take
various enforcement actions against banks, or bank directors or
officers, that engage in violations of law or unsafe or unsound
practices. The Commissioner also may appoint a receiver or
conservator for a bank under certain circumstances.
The Bank is required under New Hampshire law to maintain a
reserve of the lesser of not less than 12% of the amount of demand
deposits and 5% of the amount of time and savings deposits in cash
or in specified short-term investments, or the reserve requirements
established by the FRB. At December 31, 1996 this requirement was
satisfied.
Granite State is also subject to the periodic examination and
reporting requirements of the Commissioner. Under New Hampshire
law, Granite State may not acquire ownership or control of more
than 12 banking affiliates, including (i) banking institutions
chartered by the state and actively engaged in business as such in
the State and (ii) national banks authorized to transact business
in the State, neither may it acquire ownership or control of any of
the foregoing if, as a result, the Company and its banking
affiliates would hold deposits in New Hampshire in excess of 20% of
the total deposits of all federal and state-chartered banking
institutions, including savings associations, operating in New
Hampshire. At the present time the total of the Bank's deposits
are substantially less than 20% of total New Hampshire deposits.
<PAGE> 6
The Bank pays assessments to the Commissioners office to support
its operations. In 1996, these assessments totaled $6,425.
Federal Deposit Insurance Corporation
- -------------------------------------
Safety and Soundness Regulations
- --------------------------------
The federal regulatory agencies, including the FDIC, were
required to prescribe standards for depository institutions under
their jurisdiction relating to a variety of operating matters such
as internal controls, information systems and internal audit
systems, loan documentation and credit underwriting, interest rate
risk exposure, asset growth and quality and employee compensation.
The federal banking agencies have adopted a final rule containing
Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement safety and soundness
standards required under the Federal Deposit Insurance Act. The
Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired.
The standards set forth in the Guidelines address internal controls
and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure;
asset growth; and compensation, fees and benefits. If the
appropriate federal banking agency determines that an institution
fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable
plan to achieve compliance with the standard, as required by the
Federal Deposit Insurance Act. The final rule establishes
deadlines for the submission and review of such safety and
soundness compliance plans when such plans are required.
Investment Authority
- --------------------
The FDIC regulations restrict investments by and activities of
insured state banks such as the Bank. Effective December 19, 1992,
neither state banks nor their subsidiaries may engage in
activities, as principal, not permissible for national banks or
their subsidiaries unless the FDIC determines that the activity
would pose no significant risk to the deposit insurance fund and
the bank is and continues to comply with applicable federal capital
standards. Additionally, subject to exceptions for majority-owned
subsidiaries and certain other limited exceptions, state banks may
not acquire or retain any equity investment of a type or in an
amount not permissible for national banks. The Federal Deposit
Insurance Act does contain a partial exception from these
requirements for stock and mutual fund ownership by banks which
were authorized to make such investments by state law and had made
such investments during a specified time period. The Bank believed
it qualified for the exception and applied to the FDIC for
approval. During 1993, the Bank received approval from the FDIC to
invest in equity securities listed on a national exchange and
registered shares of mutual funds, which are otherwise
impermissible investments for national banks, in an amount not to
exceed 100 percent of its Tier 1 capital, which amounted to
$26,501,000 at December 31, 1996.
Capital Requirements
- --------------------
The FDIC has issued regulations that require Bank Insurance Fund-
insured banks, such as the Bank, to maintain minimum levels of
capital. The regulations establish a minimum leverage capital
requirement of not less than 3% core capital to total assets for
banks in the strongest financial and managerial condition, with a
CAMELS Rating of 1 (the highest rating of the FDIC for banks). For
all other banks, the minimum leverage capital requirement is 3%
plus an additional cushion of at least 1% to 2%. Core capital is
comprised of the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all
intangible assets (other than qualifying servicing rights and
purchased credit card relationships), identified losses and
investments in certain subsidiaries. At December 31, 1996, the
Bank's ratio of core capital to average total assets equaled 7.32%,
which exceeded the minimum leverage requirement.
<PAGE> 7
The FDIC also requires that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance
of a ratio of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8.00%. In
determining the amount of risk-weighted assets, all assets,
including certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are
inherent in the type of asset. The components of core capital are
equivalent to those discussed earlier under the leverage capital
requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, long term perpetual
preferred stock, mandatory convertible securities, subordinated
debt and intermediate preferred stock and allowance for loan and
lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-
weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At
December 31, 1996, the Bank met its risk based capital requirements
with a core risk-based capital to risk-weighted assets ratio of
13.03% and a total risk-based capital to risk-weighted assets ratio
of 14.14%.
Prompt Corrective Action Regulations
- ------------------------------------
Effective December 19, 1992, the regulatory agencies, including
the FDIC, were required to take certain supervisory actions against
undercapitalized banks. The severity of such action depends upon
the degree of undercapitalization. The regulations generally
require subject to a narrow exception, the appointment of a
receiver or conservator for banks whose tangible capital level
falls below 2% of assets, which appointment is to be made within a
maximum of 270 days after the threshold is reached. At December
31, 1996, the subsidiary bank was considered "well capitalized"
for purposes of the FDIC's prompt corrective action regulations.
The FDIC may institute proceedings against any insured bank or
any director, trustee, officer or employee of such bank who engages
in unsafe and unsound practices, or the violation of applicable
laws and regulations. The FDIC has the authority to terminate or
suspend insurance of accounts pursuant to procedures established
for that purpose and may appoint a receiver or conservator under
certain circumstances.
Insurance of Deposits
- ---------------------
The deposit accounts of the Bank are insured by the FDIC up to
applicable limits, generally $100,000 per insured depositor. The
FDIC issues regulations, conducts periodic examinations, requires
the filing of reports and generally supervises the operations of
its insured banks. The approval of the FDIC is required prior to a
merger or consolidation, or the establishment or relocation of an
office facility. The majority of the Bank's deposits are insured
by the Bank Insurance Fund ("BIF"). Approximately 12% of the
Bank's deposits are OAKAR deposits, which are deposits purchased
from institutions previously insured by the Savings Association
Insurance Fund ("SAIF").
During 1996, the Bank paid annual insurance premiums of $73,000
compared with $283,000 in 1995.
The FDIC has issued regulations which established a system for
setting deposit insurance premiums based upon the risks a
particular bank or savings association poses to the deposit
insurance funds. Under the rule, the FDIC assigns an institution
to one of three capital categories consisting of 1) well
capitalized, 2) adequately capitalized or 3) undercapitalized, and
one of three supervisory subcategories. An institution's
assessment rate depends on the capital category and supervisory
category to which it is assigned. In view of the BIF's achieving a
statutorily required capitalization ratio, the FDIC adopted a new
assessment rate of 0 to 27 basis points per $100 of deposits.
Under that schedule, approximately 92% of BIF members paid the
lowest assessment rate of 0 basis points (subject to a $2,000
minimum annual charge).
<PAGE> 8
Notwithstanding its status as a BIF-insured commercial bank,
approximately 12% of the Bank's deposit base consists of OAKAR
deposits, which are acquired SAIF deposits. These deposits are
assessed at the premium rate applicable to SAIF institutions.
On September 30, 1996, the President of the United States signed
into law the Deposit Insurance Funds Act of 1996 (the "Funds
Act") which, among other things, imposed a special one-time
assessment on SAIF deposits to recapitalize the SAIF. As required
by the Funds Act, the FDIC imposed a special assessment on SAIF
assessable deposits held as of March 31, 1995, payable November 27,
1996 (the "SAIF Special Assessment"). The SAIF Special
Assessment on the Bank's SAIF - assessable OAKAR deposits was
recognized as an expense in the quarter ended September 30, 1996
and was paid by the Bank during the quarter ended December 31, 1996
and is generally tax deductible. The SAIF Special Assessment
recorded by the Bank amounted to $187,000.
The Funds Act also spreads the obligations for payment of the
Financing Corporation ("FICO") bonds across all SAIF and BIF
members. Beginning on January 1, 1997, BIF deposits will be
assessed for FICO payments at a rate of 20% of the rate assessed on
SAIF deposits. Based on current estimates by the FDIC, BIF
deposits will be assessed a FICO payment of 1.3 basis points, while
SAIF deposits will pay an estimated 6.4 basis points. Full pro
rata sharing of the FICO payments between BIF and SAIF members will
occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged. The Funds Act specifies that the BIF and SAIF
will be merged on January 1, 1999, provided no savings associations
remain as of that time.
As a result of the Funds Act, the FDIC recently lowered SAIF
assessments to 0 to 27 basis points effective January, 1, 1997, a
range comparable to that of BIF members. However, SAIF deposits
will continue to be assessed at the higher FICO rate described
above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, or whether the BIF and SAIF will
eventually be merged.
Federal Reserve System
- ----------------------
Under FRB regulations, the Bank is required to maintain reserves
against its transaction accounts (primarily checking and NOW
accounts), non-personal money market deposit accounts, and non-
personal time deposits. Because reserves must generally be
maintained in cash or in non-interest bearing accounts, the effect
of the reserve requirement is to increase the Bank's cost of funds.
For most of 1996, these regulations required reserves of 3% of
total transaction accounts of up to $52.0 million. Total
transaction accounts amounting to over $52.0 million required a
reserve of $1.6 million plus 10% (this rate is set by the FRB and
can range from 8% to 14%) of that portion of total transaction
accounts in excess of such amount. In addition, reserves in the
amount of 3% must be maintained on non-personal money market
deposit accounts. Institutions were permitted to designate and
exempt $4.3 million of reservable liabilities from these reserve
requirements. These amounts and percentages are subject to
adjustment by the FRB. The Bank was in compliance with its reserve
requirements at December 31, 1996. The Bank also has the authority
to borrow from the Federal Reserve Board "discount window" to meet
its short-term liquidity needs.
During December, 1996, the amount of reservable liabilities
exempt from reserve requirements was increased to $4.4 million and the
level at which reservable liabilities would be subject to the 10%
rate was lowered to $49.3 million. The effects of these recent
actions will not have any significant impact on the Bank's
liquidity and profitability.
Under the Federal Change in Bank Control Act ("CIBCA"), a prior
notice must be submitted to the FRB if any person or group acting
in concert seeks to acquire 10% or more of Granite State common
stock, unless (if less than 25% is to be beneficially owned) the
FRB finds that the acquisition will not result in change in
control. Under CIBCA, the FRB has 60 days within which to act,
taking into
<PAGE> 9
consideration factors similar to those under the Bank
Holding Company Act ("BHCA"). Under the BHCA, any company would be
required to obtain prior approval from the FRB before obtaining
control of the Holding Company. Control generally is defined as
beneficial ownership of 25 percent or more of any class of voting
securities of the Company. An existing bank holding company would
need to receive prior FRB approval before acquiring more than 5% of
the voting securities of the Company.
Granite State and its subsidiary are subject to examination,
regulation and periodic reporting by the FRB under the BHCA. FRB
approval is required for acquisitions of either financial
institutions or other entities, or the commencement of new
activities by the Company. Pursuant to recent legislation,
interstate holding company acquisitions of banks are permitted
generally without regard to state law, except state laws regarding
deposit concentration. The legislation also contemplates
interstate expansion by bank merger or de novo branching if the
states involved allow. Granite State and its subsidiary may engage
only in activities that are deemed to be related to banking by the
FRB. The FRB has adopted capital adequacy guidelines for bank
holding companies (on a consolidated basis) substantially similar
to those of the FDIC for the Bank.
The Federal Reserve Board has issued guidelines for a risk-based
approach to measuring the capital adequacy of bank holding
companies and state-chartered banks which are members of the
Federal Reserve System. These capital requirements generally call
for an 8 percent total capital ratio, of which 4 percent must be
comprised of Tier I capital. Risk-based capital ratios are
calculated by weighting assets and off-balance sheet instruments
according to their relative credit risks. In addition to the risk-
based capital standard, bank holding companies such as the Company
must maintain a minimum leverage ratio of Tier I capital to total
assets of at least 4 percent, with Tier I capital for this purpose
being defined consistent with the risk-based capital guidelines.
At December 31, 1996, Granite State had consolidated Tier I and
total risk-based capital ratios of 13.14% and 14.23%, respectively
and a leverage ratio of Tier I capital to average total assets of
7.50%.
Federal Home Loan Bank System
- -----------------------------
Granite Bank is a member of the FHLB of Boston, which is one of
12 regional Federal Home Loan Banks. The FHLB serves as a reserve
or central bank for its members. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the
Federal Home Loan Bank system. It makes advances (i.e., loans) to
members in accordance with policies and procedures established by
the Board of Directors of the FHLB. The Bank's membership in the
FHLB is voluntary and can be terminated by the Bank at any time
when its advances are paid.
As a member of the FHLB, the Bank is required to purchase and
hold stock in the FHLB in an amount equal to the greater of 1% of
the aggregate of unpaid residential mortgage loan balances and the
carrying value of mortgage-backed securities outstanding at the
beginning of the year; 5% of FHLB advances outstanding; or 1% of
30% of total assets. As of December 31, 1996, Granite Bank held
stock in the FHLB in the amount of $3,215,000.
(3) Monetary Policies
Granite State and the Bank are affected by the monetary and
fiscal policies of various agencies of the United States
Government, including the Federal Reserve System. In view of
changing conditions in the national economy and in the money
markets, it is impossible for the management of Granite State to
accurately predict future changes in monetary policy or the effect
of such changes on the business or financial condition of Granite
State.
<PAGE> 10
(4) Employees
As of December 31, 1996, Granite State and its subsidiary
employed 133 full time equivalent officers and employees. Granite
State considers relations with its employees to be satisfactory.
None of the employees of the Company or its subsidiary are
represented by a collective bargaining group.
(5) Statistical Information
The statistical information on Granite State set forth in the
following sections is furnished pursuant to Industry Guide 3 under
the Securities Exchange Act of 1934.
(A) Distribution of Assets, Liabilities, and
Stockholders' Equity;
Interest Rates and Interest Differential
Information regarding the distribution of assets, liabilities and
stockholders' equity; interest rates and interest differential for
each of the three years in the period ended December 31, 1996, on
page 15 of the Annual Report to Stockholders for the year ended
December 31, 1996 are incorporated herein by reference.
(B) Rate/Volume Analysis
Information regarding the dollar amount of changes in interest
income and interest expense for interest earning assets and
interest bearing liabilities attributable to changes in interest
rates, changes in volume and changes attributable to rate and
volume for each of the two years in the period ended December 31,
1996, on page 16 of the Annual Report to Stockholders for the year
ended December 31, 1996 are incorporated herein by reference
(C) Investment Portfolio
The Company follows Financial Accounting Standards Board
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Under SFAS No. 115, debt securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; debt and equity
securities that are bought and held principally for the purpose of
selling in the near term are classified as trading and reported at
fair value, with unrealized gains and losses included in earnings;
and debt and equity securities not classified as either held-to-
maturity or trading are classified as available-for-sale and
reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders'
equity, net of estimated income taxes. The Company classifies its
securities into three categories: held-to-maturity, available-for-
sale and held for trading. The Company had no securities
classified as trading securities at December 31, 1996, 1995 and
1994 and had no securities classified as held to maturity at
December 31, 1995.
<PAGE> 11
The following table sets forth the amortized cost, unrealized
gains and losses, and estimated market values of securities held to
maturity and securities available for sale at December 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
--------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
AT DECEMBER 31, 1996
US Government agency obligations $ 9,500 $ 4 $ 11 $ 9,493
--------- --------- --------- ---------
Total securities held to maturity $ 9,500 $ 4 $ 11 $ 9,493
========= ========= ========= =========
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1996
US Treasury obligations $ 25,847 $ 26 $ 21 $ 25,852
US Government agency obligations 52,749 13 204 52,558
Other corporate obligations 5,476 27 5,449
Mutual Fund 5,239 5 5,244
Marketable equity securities 7,073 3,252 5 10,320
--------- --------- --------- ---------
Total securities available for sale $ 96,384 $ 3,296 $ 257 $ 99,423
========= ========= ========= =========
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1995
US Treasury obligations $ 59,016 $ 452 $ 16 $ 59,452
US Government agency obligations 17,000 7 17,007
Other corporate obligations 9,495 51 9,444
Mutual Fund 3,000 9 3,009
Marketable equity securities 4,036 2,077 9 6,104
--------- --------- --------- ---------
Total securities available for sale $ 92,547 $ 2,545 $ 76 $ 95,016
========= ========= ========= =========
SECURITIES HELD TO MATURITY
AT DECEMBER 31, 1994
Other corporate obligations $ 15,499 $ 239 $ 15,260
--------- --------- --------- ---------
Total securities held to maturity $ 15,499 $ 0 $ 239 $ 15,260
========= ========= ========= =========
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1994
US Treasury obligations $ 58,912 $ 1,410 $ 57,502
US Government agency obligations 3,000 45 2,955
Other corporate obligations 9,484 202 9,282
Marketable equity securities 2,701 $ 664 72 3,293
--------- --------- --------- ---------
Total securities available for sale $ 74,097 $ 664 $ 1,729 $ 73,032
========= ========= ========= =========
</TABLE>
As a member of the Federal Home Loan Bank (FHLB) of Boston, the
Bank is required to invest in $100 par value stock of the FHLB of
Boston in the amount of 1% of its outstanding loans secured by
residential housing, or 1% of 30% of total assets, or 5% of its
outstanding advances from the FHLB of Boston, whichever is higher.
When such stock is redeemed, the Bank would receive from the FHLB
of Boston an amount equal to the par value of the stock. As of
December 31, 1996, 1995 and 1994, the Company had investments in
FHLB of Boston stock of $3,215,000, $3,215,000, and $3,215,000
respectively. At December 31, 1996 the weighted average yield on
FHLB of Boston stock was 6.40%.
<PAGE> 12
The following table sets forth the maturity distribution of
securities held to maturity and securities available for sale at
December 31, 1996 and the weighted average yields of such
securities (calculated on the basis of the cost and effective
yields weighted for the scheduled maturity of each security).
<TABLE>
<CAPTION>
Amortized Weighted
Cost Average Yield
--------- ---------
(In Thousands)
<S> <C> <C>
US Treasury obligations
Due within 1 year $ 16,015 5.90%
Due after 1 but within 5 years 9,832 5.87%
---------
Total 25,847 5.89%
---------
US Government Agency obligations
Due within 1 year 0 0.00%
Due after 1 but within 5 years 62,249 6.20%
---------
Total 62,249 6.20%
---------
Other corporate obligations
Due within 1 year 0 0.00%
Due after 1 but within 5 years 5,476 6.45%
---------
Total 5,476 6.45%
---------
Total debt securities 93,572 6.13%
Mutual fund shares* 5,239 5.98%
Marketable equity securities* 7,073 4.85%
Net unrealized gains on
securities available for sale 3,039
---------
Total securities held to maturity
and securities available for sale $ 108,923 6.04%
=========
</TABLE>
Included in total debt securities above are U.S. Government
Agency obligations classified as securities held to maturity, with
an amortized cost of $9,500,000, all of which are due after one but
within five years with a weighted average yield of 6.51%. All
other debt securities are classified as securities available for
sale.
*Mutual fund shares and marketable equity securities have no
stated maturity, and are therefore considered to be due after 10
years.
Securities held to maturity and securities available for sale of
individual issuers, with a book value in excess of 10% of
stockholders' equity, excluding U.S. Treasury and U.S. Government
agency obligations, at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Par Value Book Value Market Value Coupon Maturity Date
---------- ---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Dean Witter/Discover & Co $ 3,500 $ 3,487 $ 3,487 6.35% 2-Mar-99
Asset Management Fund, Inc. -
Mutual Fund Shares (527,054 shs) N/A 5,244 5,244 N/A N/A
</TABLE>
<PAGE> 13
(D) Loan Portfolio
The following table shows Granite State's loan distribution as of
December 31:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, Financial & Agricultural $ 9,849 $ 10,696 $ 11,787 $ 14,746 $ 20,374
Real Estate-Residential 122,561 111,578 118,647 117,251 104,178
Real Estate-Commercial 58,302 52,555 48,185 39,332 35,169
Real Estate-Construction and Land Development 3,030 2,676 3,436 3,832 1,890
Installment 4,488 4,438 3,685 4,588 5,753
Other 8,109 8,426 8,847 8,937 10,348
----------- ----------- ----------- ----------- -----------
Total Loans 206,339 190,369 194,587 188,686 177,712
Less:
Allowance for Possible Loan Losses (3,676) (3,704) (4,230) (4,004) (3,864)
Unearned Income (1,860) (2,356) (2,930) (3,364) (4,174)
----------- ----------- ----------- ----------- -----------
Loans, net $ 200,803 $ 184,309 $ 187,427 $ 181,318 $ 169,674
=========== =========== =========== =========== ===========
</TABLE>
(E) Maturity of Loans
The following table shows the maturity/repricing distribution of
loans outstanding, excluding non-accrual loans of $2,022,000 as of
December 31, 1996. Fixed rate loans are entered by remaining
maturity while adjustable rate loans are included by repricing
frequency. This table does not reflect scheduled loan
amortization.
<TABLE>
<CAPTION>
One Year Over One Year Over
or Less to Five Years Five Years Total
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial, Financial & Agricultural $ 8,775 $ 1,023 $ 0 $ 9,798
Real Estate-Residential 75,980 38,883 6,116 120,979
Real Estate-Commercial 55,305 2,336 275 57,916
Real Estate-Construction and Land Development 3,001 12 17 3,030
Installment 1,311 3,120 54 4,485
Other 7,746 68 295 8,109
---------- ---------- ---------- ----------
$ 152,118 $ 45,442 $ 6,757 $ 204,317
========== ========== ========== ==========
Loans maturing after one year:
Fixed Interest Rate $ 7,030 $ 6,755 $ 13,785
Variable Interest Rate 38,412 2 38,414
---------- ---------- ----------
$ 45,442 $ 6,757 $ 52,199
========== ========== ==========
</TABLE>
<PAGE> 14
(F) Nonperforming Loans and Assets
The following table summarizes Granite State's nonperforming
loans and assets at December 31. Amounts shown reflect principal
only.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming Loans:
Commercial, Financial & Agricultural $ 50 $ 35 $ 81 $ 17 $ 390
Real Estate-Residential 1,582 1,341 1,495 1,801 1,166
Real Estate-Commercial 386 332 646 103 399
Real Estate-Construction and Land Development 88 54 177 67
Installment and other 4 2 8 17 366
--------- --------- --------- --------- ---------
Total nonperforming loans 2,022 1,798 2,284 2,115 2,388
Other real estate owned 1,512 2,691 3,009 4,269 6,839
--------- --------- --------- --------- ---------
Total nonperforming loans and other real estate owned $ 3,534 $ 4,489 $ 5,293 $ 6,384 $ 9,227
========= ========= ========= ========= =========
Percentage of nonperforming loans and
other real estate owned to total loans receivable 1.71% 2.36% 2.72% 3.38% 5.19%
========= ========= ========= ========= =========
Percentage of nonperforming loans and
other real estate owned to total assets 0.95% 1.30% 1.70% 2.11% 3.03%
========= ========= ========= ========= =========
Loans delinquent 90 days or more included in
nonperforming loans above $ 794 $ 1,057 $ 872 $ 807 $ 1,584
========= ========= ========= ========= =========
Loans delinquent 90 days or more still accruing,
not included in above $ 93 $ 0 $ 21 $ 0 $ 0
========= ========= ========= ========= =========
</TABLE>
Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of
interest or principal, or when a loan becomes contractually past
due by ninety days unless the loan is well secured and in the
process of collection. When a loan is placed on nonaccrual status,
all interest previously accrued and not received is reversed
against current period earnings.
For the year ended December 31, 1996, the gross interest income
on nonperforming loans that would have been recorded, had such
loans been current in accordance with their original terms amounted
to $263,000. The amount of interest income on those loans included
in net earnings for the year ended December 31, 1996 amounted to
$93,000.
The Company adopted SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan," on January 1, 1995. This new standard
requires that a creditor measure impairment based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market
price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a
creditor must measure impairment based on the fair value of the
collateral when the creditor determines that foreclosure is
probable. In October 1994, SFAS No. 114 was amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," which allows creditors to use their
existing methods for recognizing interest income on impaired loans.
Because the Company already recognized such reductions of value on
impaired loans through its provision for possible loan losses, the
adoption of SFAS No. 114, as amended by SFAS No. 118, did not have
a material impact on its financial condition or results of
operations. The balance of impaired loans was $805,000 and
$1,022,000 at December 31, 1996 and 1995, respectively. The
Company has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the
contractual terms of
<PAGE> 15
the loan agreements. The allowance for
possible loan losses associated with impaired loans allocated from
and part of the general allowance for possible loan losses, upon
the adoption of SFAS No. 114, on January 1, 1995 was $864,000.
During 1996 and 1995, provisions to the allowance for impaired
loans amounted to $377,000 and $553,000, respectively and impaired
loans charged-off amounted to $578,000 and $1,050,000,
respectively. The allowance for possible loan losses associated
with impaired loans at December 31, 1996 and 1995 was $166,000 and
$367,000, respectively. At December 31, 1996 and 1995, there were
no impaired loans which did not have an allowance for possible loan
losses determined in accordance with SFAS No. 114. The average
recorded investment in impaired loans was $634,000 and $1,482,000,
respectively in 1996 and 1995 and the income recognized on impaired
loans during 1996 and 1995 was $4,000 and $19,000, respectively.
Total cash collected on impaired loans during 1996 and 1995 was
$770,000 and $103,000, respectively, of which $766,000 and $84,000,
respectively, was credited to the principal balance outstanding on
such loans. Interest which would have been accrued on impaired
loans during 1996 and 1995, had they performed in accordance with
the terms of their contracts, was $61,000 and $166,000,
respectively. The company's policy for interest income recognition
on impaired loans is to recognize income on nonaccrual loans under
the cash basis when the loans are both current and the collateral
on the loan is sufficient to cover the outstanding obligation to
the Company; if these factors do not exist, the Company does not
recognize income. Impaired loans consisted of $418,000 of
residential real estate loans and $387,000 of commercial real
estate loans at December 31, 1996 and $650,000 of residential real
estate loans and $372,000 of commercial real estate loans at
December 31, 1995. Such loans were measured for impairment using
the fair value of the loans' collateral.
Other real estate owned is comprised of properties acquired
through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure. Real estate formally acquired in settlement of loans
is recorded at the lower of the carrying value of the loan or the
fair value of the property received less an allowance for estimated
costs to sell. Loan losses arising from the acquisition of such
properties are charged against the allowance for possible loan
losses. Provisions to reduce the carrying value to net realizable
value are charged to current period earnings as realized and
reflected as an addition to the valuation allowance. Operating
expenses and gains and losses upon disposition are reflected in
earnings as realized.
Other real estate owned at December 31 was comprised as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Condominiums and apartment projects $ 340 $ 266 $ 701 $ 492 $ 449
Single family housing projects 775 787 1,050 1,024 1,230
Retail and office 426 481 691 2,327
Non-retail commercial 556 1,593 1,166 1,760 1,519
Residential 306 75 107 711 1,564
--------- --------- --------- --------- ---------
1,977 3,147 3,505 4,678 7,089
Less: Valuation allowance 465 456 496 409 250
--------- --------- --------- --------- ---------
$ 1,512 $ 2,691 $ 3,009 $ 4,269 $ 6,839
========= ========= ========= ========= =========
</TABLE>
As of December 31, 1996, there were no loan concentrations
exceeding 10% of total loans.
As of December 31, 1996, neither Granite State nor its
subsidiary, Granite Bank, had any foreign loans.
(G) Summary of Loan Loss Experience and Allocation
of the Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained through
provisions for possible loan losses based upon management's ongoing
evaluation of the risks inherent in the loan portfolio.
Management's evaluation of the loan portfolio includes many
factors, such as identification and review of individual
<PAGE> 16
problem situations that may affect the borrower's ability to repay;
review of overall portfolio quality through an analysis of current
charge-offs, delinquency, and nonperforming loan data; review of
regulatory authority examinations and evaluations of loans; an
assessment of current and expected economic conditions; and changes
in the size and character of the loan portfolio. At December 31,
1992 and 1993, the level of the allowance was lower than the 1991
level due to management's assessment of reductions in nonperforming
loans as well as an apparent stabilization of the New Hampshire
economy and the regional real estate markets. At December 31,
1994, the level of the allowance was higher than the 1993 level,
due to an increase in nonperforming loans as well as an increase in
the balance of the loan portfolio. The level of the allowance at
December 31, 1995 was lower than the 1994 level, due primarily to a
reduction in the level of nonperforming loans, as well as a
reduction in the balance of the loan portfolio. At December 31,
1996, the level of the allowance was fairly stable with the level
of the allowance at December 31, 1995, based on management's
overall evaluation of the adequacy of the allowance in relation to
nonperforming loans, total loans and the risks inherent in the loan
portfolio. While management believes that the allowance for
possible loan losses at December 31, 1996 is adequate based on its
current review and estimates, further provisions to the allowance
may be necessary if the market in which the Company operates
deteriorates. Additionally, regulatory agencies review the
Company's allowance for loan losses as part of their examination
process. Such agencies may require the Company to recognize
additions to the allowance based upon judgements which may be
different from those of management.
Changes in the allowance for possible loan losses for the year
ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,704 $ 4,230 $ 4,004 $ 3,864 $ 4,570
Provision for possible loan losses 650 735 600 637 752
Loans charged off (1,193) (1,405) (421) (573) (1,660)
Recoveries of loans previously charged off 515 144 47 76 202
--------- --------- --------- --------- --------
Balance at end of year $ 3,676 $ 3,704 $ 4,230 $ 4,004 $ 3,864
========= ========= ========= ========= =========
</TABLE>
A summary of loan charge-offs by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 537 $ 766 $ 9 $ 123 $ 159
Real estate-Residential 393 333 204 165 622
Real estate-Commercial 258 300 199 143 352
Real estate-Construction and land development 186
Installment and other loans 5 6 9 142 341
--------- --------- --------- --------- ---------
$ 1,193 $ 1,405 $ 421 $ 573 $ 1,660
========= ========= ========= ========= =========
</TABLE>
A summary of loan recoveries by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 365 $ 19 $ 16 $ 16 $ 41
Real estate-Residential 9 80 27 13 41
Real estate-Commercial 88 3 2 33 102
Real estate-Construction and land development 50 38 0 0 0
Installment and other loans 3 4 2 14 18
--------- --------- --------- --------- ---------
$ 515 $ 144 $ 47 $ 76 $ 202
========= ========= ========= ========= =========
</TABLE>
<PAGE> 17
The ratio of net loan charge offs to average loans outstanding
for the year ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Net loan chargeoffs $ 678 $ 1,261 $ 374 $ 497 $ 1,458
========== ========== ========== ========== ==========
Average loans outstanding $ 192,898 $ 191,696 $ 189,034 $ 181,069 $ 176,367
========== ========== ========== ========== ==========
Ratio of net loan chargeoffs
to average loans outstanding 0.35% 0.66% 0.20% 0.27% 0.83%
========== ========== ========== ========== ==========
</TABLE>
An allocation of the allowance for possible loan losses as of
December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------- ------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
---------- ---------- ----------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 304 4.77% $ 366 5.62% $ 1,349 6.06%
Real estate-Residential 1,141 59.39% 1,079 58.60% 1,003 60.97%
Real estate-Commercial 1,842 28.26% 1,997 27.61% 1,642 24.76%
Real estate-Construction
and land development 94 1.47% 98 1.41% 91 1.77%
Installment and other loans 295 6.11% 164 6.76% 145 6.44%
---------- ---------- ---------- ---------- ---------- ----------
$ 3,676 100.00% $ 3,704 100.00% $ 4,230 100.00%
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1993 1992
------------------------ ------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 704 7.82% $ 1,062 11.46%
Real estate-Residential 1,742 62.13% 1,122 58.63%
Real estate-Commercial 1,184 20.85% 1,193 19.79%
Real estate-Construction
and land development 174 2.03% 62 1.06%
Installment and other loans 200 7.17% 425 9.06%
---------- ---------- ---------- ----------
$ 4,004 100.00% $ 3,864 100.00%
========== ========== ========== ==========
</TABLE>
The allowance for possible loan losses as a percentage of loans
outstanding at December 31 of each reported period is as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance for possible
loan losses as a percentage
of total loans outstanding 1.78% 1.95% 2.17% 2.12% 2.17%
======== ======== ======== ======== ========
</TABLE>
<PAGE> 18
(H) Risks Associated with Commercial Real Estate,
Commercial and Construction Loans
Commercial real estate and commercial lending involves
significant additional risks compared with one-to-four family
residential mortgage lending, and therefore typically accounts for
a disproportionate share of delinquent loans and real estate owned
through foreclosure or by deed in lieu of foreclosure. Such
lending generally involves larger loan balances to single borrowers
or groups of related borrowers than does residential lending, and
repayment of the loan depends in part on the underlying business
and financial condition of the borrower and is more susceptible to
adverse future developments. If the cash flow from income-
producing property is reduced, for example, because leases are not
obtained or renewed, the borrower's ability to repay the loan may
be materially impaired. These risks can be significantly affected
by considerations of supply and demand in the market for office,
manufacturing and retail space and by general economic conditions.
As a result, commercial real estate and commercial loans are likely
to be subject, to a greater extent than residential real estate
loans, to adverse conditions in the general economy.
Construction loans are, in general, subject to the same risks as
commercial real estate loans, but involve additional risks as well.
Such additional risks are due to uncertainties inherent in
estimating construction costs, delays arising from labor problems,
shortages of material, uncertain marketability of a complete
project and other unpredictable contingencies that make it
relatively difficult to determine accurately the total loan funds
required to complete a project or the value of the completed
project. Construction loan funds are advanced on the security of
the project under construction, which is of uncertain value prior
to the completion of construction. This uncertainty is increased
in depressed real estate markets. When a construction project
encounters cost overruns, marketing or other problems, it may
become necessary, in order to sustain the project and preserve
collateral values, for the lender to advance additional funds and
to extend the maturity of its loan. In a declining market, there
is no assurance that this strategy will successfully enable the
lender to recover outstanding loan amounts and interest due.
Moreover, foreclosing on such properties results in administrative
expense and substantial delays in recovery of outstanding loan
amounts and provides no assurance that the lender will recover all
monies due to it, either by developing the property, subject to
regulatory limitations and to the attendant risks of development,
or by selling the property to another developer.
(I) Deposits
The average balance of deposits and the average rates paid
thereon are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---------- ---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits:
Interest bearing NOW deposits $ 102,181 3.10% $ 71,367 2.89% $ 50,403 1.63%
Money market deposits 14,077 2.87% 22,181 2.95% 34,476 2.61%
Savings deposits 40,363 2.74% 49,147 2.90% 64,454 2.62%
Time deposits 107,689 5.52% 99,248 5.38% 76,967 3.81%
---------- ---------- ----------
Total interest bearing deposits $ 264,310 4.02% $ 241,943 3.92% $ 226,300 2.80%
========== ========== ========== ========== ========== ==========
Noninterest bearing deposits $ 29,766 N/A $ 27,685 N/A $ 27,027 N/A
========== ========== ==========
</TABLE>
<PAGE> 19
(J) Maturities of Time Deposits
The maturity distribution of time certificates of deposit of
$100,000 or more at December 31, 1996 follows:
<TABLE>
<CAPTION>
REMAINING MATURITY BALANCE
- --------------------- ----------
(In Thousands)
<S> <C>
3 months or less $ 3,445
Over 3 through 6 months 2,303
Over 6 through 12 months 2,754
Over 12 through 36 months 3,570
Over 36 months 202
----------
$ 12,274
==========
</TABLE>
(K) Return on Equity and Assets
Operating and capital ratios for the year ended December 31
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings to average assets 1.07% 1.05% 0.91%
Net earnings to average
stockholders' equity 12.46% 12.23% 10.73%
Dividend pay out ratio on common stock -primary 31.28% 30.38% 28.35%
-fully diluted 31.46% 30.57% 28.57%
Average equity to average total assets 8.62% 8.59% 8.48%
</TABLE>
(L) Borrowings
Information regarding the borrowings in Note K to the
consolidated Financial Statements in the Annual Report to
Stockholders for the year ended December 31, 1996 is incorporated
herein by reference.
Short-Term Borrowings
- ---------------------
Outstanding short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Demand borrowings under available lines of credit $ 0 $ 0 $ 20,904
========= ========= =========
Securities sold under agreements to repurchase $ 31,535 $ 26,189 $ 21,968
========= ========= =========
</TABLE>
<PAGE> 20
The maximum amount of short-term borrowings outstanding at any
month end during the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Demand borrowings under available lines of credit $ 4,704 $ 23,336 $ 28,795
========= ========= =========
Securities sold under agreements to repurchase $ 31,535 $ 28,298 $ 21,968
========= ========= =========
</TABLE>
The average balance of short-term borrowings and weighted average
interest rates thereon for the year ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- -----------------------
Average Weighted Average Weighted Average Weighted
Balance Average Rate Balance Average Rate Balance Average Rate
--------- --------- --------- --------- --------- ---------
($ in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand borrowings under
available Lines of Credit $ 796 6.41% $ 5,742 6.36% $ 13,304 5.24%
========= ========= ========= ========= ========= =========
Securities sold under
agreements to repurchase $ 24,727 4.67% $ 21,133 5.24% $ 15,500 4.16%
========= ========= ========= ========= ========= =========
Short-term fixed rate borrowings $ 0 N/A $ 0 N/A $ 0 N/A
========= ========= ========= ========= ========= =========
</TABLE>
(M) Competition
The Bank continues to experience substantial competition in
attracting and retaining deposit accounts and in making mortgage
and other loans. There are numerous federally-insured banks and
thrifts with offices within Granite Bank's principal market areas,
many of which are headquartered there. In addition, the Bank
experiences competition from credit unions and other financial
intermediaries which are not subject to similar State and Federal
regulations.
The primary factors in competing for deposit accounts are
service, interest rates, convenience and, to a lesser extent,
products offered. Competitors for deposit accounts include other
depository institutions and other investment vehicles such as
mutual funds, government and corporation obligations, and the
equity capital markets.
The primary factors in competing for loans are interest rates,
loan origination fees and the quality and range of lending products
and services offered. Competition for origination of loans comes
primarily from savings institutions, mortgage banking firms, and
other commercial banks.
(N) Subsidiaries
Granite State owns 100% of the capital stock of Granite Bank, a
New Hampshire chartered commercial bank, its sole subsidiary.
(d) Financial Information about Foreign and Domestic
Operations and Export Sales
Not applicable.
<PAGE> 21
Item 2. Description of Property
The following table sets forth the location of the Company's
offices as of December 31, 1996. See also Notes G and L to the
Consolidated Financial Statements in the Annual Report to
Stockholders for the year ended December 31, 1996 which is
incorporated herein by reference.
<TABLE>
<CAPTION>
Office Type Location City/Town Status
- ---------------- ------------------------ ------------ -------
<S> <C> <C> <C>
Full service 122 West Street Keene Owned*
(Headquarters)
Full service Routes 9 and 63 Chesterfield Owned*
Full service Elm Street at Route 101 Milford Owned*
Full service Route 101A & 122 Amherst Owned*
Full service 21 Grove Street Peterborough Owned*
Full service Jct Route 101 & 202 Peterborough Leased*
Full service 70 Main Street Durham Owned*
Full service Southgate Plaza, Route 1 Portsmouth Owned*
Full service 93 Middle Street Portsmouth Owned*
</TABLE>
Additionally, the Company operates thirteen ATMs at other
locations in Keene, Fitzwilliam, Milford, Amherst, Durham, West Swanzey and
North Swanzey, New Hampshire. The ATM facilities and their enclosures
are owned by the Company; the property on which they are located
is leased. All offices and ATM facilities are located in New
Hampshire.
*Office includes an ATM facility. The Durham branch has two ATM
facilities on site.
Item 3. Legal Proceedings
The Company is a defendant in various legal actions incident to
its business, none of which is believed by management to be
material to the financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE> 22
Additional Item. Executive Officers
Information regarding executive officers not listed as directors
in the Proxy Statement is as follows:
Charles B. Paquette (age 44) is the Executive Vice President,
Secretary and Chief Operations Officer of the Holding Company and
Senior Executive Vice President, Secretary and Chief Operations
Officer of Granite Bank, positions he assumed in 1986 and 1991,
respectively. Mr. Paquette has been employed in a management
position by the Company and Granite Bank since 1980.
William C. Henson (age 41) is the Executive Vice President of the
Holding Company and Director of Community Banking of Granite Bank,
positions he assumed in 1986 and 1996, respectively. Mr. Henson
joined the Bank in 1980, and has since served in a management
capacity.
William G. Pike (age 45) is the Executive Vice President and
Chief Financial Officer of the Holding Company and Granite Bank,
positions he assumed in December 1991 when he joined the Company.
From 1987 to December of 1991, Mr. Pike was a partner in the firm
of Grant Thornton, Accountants and Management Consultants.
William D. Elliott (age 49) is Senior Vice President and
Commercial Lending Officer of Granite Bank. Mr. Elliott joined
Granite Bank as Senior Vice President and Senior Loan Officer in
April, 1990 and served as Executive Vice President from February
1992 to December of 1996. From December 1981 to December 1989, Mr.
Elliott was Executive Vice President and Senior Loan Officer of
Indian Head National Bank of Keene. In December of 1989 Indian
Head National Bank of Keene was acquired by Fleet Bank, where Mr.
Elliott assumed the position of Vice President and Regional
Commercial Banking Manager until he joined Granite Bank.
<PAGE> 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
(a) Market Information
Granite State's common stock is quoted on the Nasdaq Stock Market
under the symbol GSBI. The following table shows the range of the
high and low prices and dividend information on a quarterly basis
for Granite State's common stock for 1996 and 1995. The table does
not reflect inter-dealer prices, potential mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1996
-----------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Dividends declared per share... $ .14 $ .14 $ .14 $ .14
Stock Price
High........................... 22.75 18.75 18.75 18.00
Low............................ 18.63 18.00 17.38 16.13
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Dividends declared per share... $ .12 $ .12 $ .12 $ .12
Stock Price
High........................... 17.25 17.25 13.63 13.25
Low............................ 16.13 13.06 12.25 11.38
</TABLE>
(b) Holders
As of March 17, 1997, Granite State had approximately 744 common
shareholders.
(c) Dividends
The holders of common stock of Granite State are entitled to
receive and share pro-rata in such dividends as may be declared by
the Board of Directors of Granite State out of funds legally
available therefore. Granite State is permitted by New Hampshire
corporate law to pay dividends out of unreserved and unrestricted
earned surplus or from unreserved and unrestricted net earnings of
a current fiscal year and the next preceding fiscal year taken as a
single period, as and when declared by its Board of Directors.
New Hampshire banking regulations prohibit the payment of a cash
dividend if the effect thereof would cause the net worth of the
Bank to be reduced below either the amount required for its
liquidation account or applicable capital requirements. The
liquidation account was established in connection with Granite
Bank's conversion from a mutual to a stock savings bank
("conversion") for the benefit of certain depositors in the event
of a liquidation of the Bank. The initial amount of the
liquidation account, as originally established, equaled the Bank's
net worth of $5,603,000 at February 28, 1986, and has since been
declining as deposits have been reduced or withdrawn (it will never
be increased, despite additional deposits). The balance of the
liquidation account at December 31, 1996 was approximately
$674,000. The Federal Deposit Insurance Act prohibits the Bank
from making a capital distribution, including payment of a cash
dividend, if the Bank would not meet applicable capital
requirements after the payment. Furthermore, the Federal Deposit
Insurance Act prohibits the Bank from paying dividends on its
capital stock if it is in default in the payment of any assessment
to the FDIC.
<PAGE> 24
Item 6. Management's Discussion and Analysis or Plan of Operation
Management's Discussion and Analysis or Plan of Operation on
pages 9 to 23, inclusive, of the Annual Report to Stockholders for
the year ended December 31, 1996 is incorporated herein by
reference.
Item 7. Financial Statements
(a) Financial Statements Required by Regulation S-X
Information relating to financial statements on pages 25 to 48,
inclusive, of the Annual Report to Stockholders for the year ended
December 31, 1996 is incorporated herein by reference.
(b) Supplementary Financial Information
(1) Selected Quarterly Financial Data
The Selected Quarterly Financial Data on pages 49 to 50 of the
Annual Report to Stockholders for the year ended December 31, 1996
is incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Management's discussion of the effects of inflation on page 22 of
the Annual Report to Stockholders for the year ended December 31,
1996 is incorporated herein by reference.
(3) Information About Oil and Gas Producing Activities
Not applicable.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE> 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
Information regarding directors and executive officers of Granite
State on pages 3 to 4 of the Proxy Statement for the 1997 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 10. Executive Compensation
Information regarding executive compensation on pages 4 to 7 of
the Proxy Statement for the 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial
owners and Granite State's management on pages 2 to 4 of the Proxy
Statement for the 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information regarding certain relationships and related
transactions on page 7 of the Proxy Statement for the 1997 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) List of Documents Filed as Part of this Report
(1) Financial Statements
The financial statements listed below and the report of
independent certified public accountants are incorporated herein by
reference to the Annual Report to Stockholders for the year ended
December 31, 1996, in Item 7. Page references are to such Annual
Report.
<TABLE>
<CAPTION>
Financial Statements Page Reference
- -------------------- --------------
<S> <C>
Granite State Bankshares, Inc. and Subsidiary
Report of Independent Certified Public Accountants 25
Consolidated Statements of Financial Condition 26
Consolidated Statements of Earnings 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 30-48
</TABLE>
<PAGE> 26
(2) Financial Statements Schedules
Schedules of the Consolidated Financial Statements required by
the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable, and therefore have been omitted.
The remaining information appearing in the Annual Report to
Stockholders for the year ended December 31, 1996, is not deemed
to be filed as part of this report, except as expressly provided
herein.
(b) Reports on Form 8-K
None.
<PAGE> 27
(c) Exhibits
The exhibits listed below are filed herewith or are incorporated
by reference to other filings.
EXHIBIT INDEX TO FORM 10-KSB
Exhibit 3.1 Articles of Incorporation*
Exhibit 3.2 Bylaws
Exhibit 10.1 Stock Option Plan*
Exhibit 10.2 Employment Agreement with Charles W. Smith*
Exhibit 10.3 Amendment No. 1 to Employment Agreement with Charles W. Smith
Exhibit 10.4 Form of Special Termination Agreement with Messrs.
Charles B. Paquette, William C. Henson, William G.
Pike and William D. Elliott
Exhibit 10.5 Employee Stock Ownership Plan*
Exhibit 10.6 Purchase and Assumption Agreement and related Indemnity
Agreement between Granite Bank and the Resolution Trust
Corporation dated August 2, 1991**
Exhibit 10.7 Purchase and Assumption Agreement and related Indemnity
Agreement between Granite Bank and the Federal Deposit
Insurance Corporation dated November 15, 1991***
Exhibit 11 Calculations of Earnings Per Common and Common Equivalent
Share and Earnings Per Common Share Assuming Full Dilution
Exhibit 13 Portions of the Annual Report to Stockholders for the year
ended December 31, 1996
Exhibit 21 Subsidiary of Granite State Bankshares, Inc. ****
Exhibit 23 Consent of Independent Certified Public Accountants
Exhibit 27 Financial Data Schedule
*Incorporated by reference from Granite State Bankshares, Inc.,
Form S-1, filed on April 18, 1986.
**Incorporated by reference from Granite State Bankshares, Inc.,
Form 8-K, Exhibits 2.1 and 2.2, filed on August 16, 1991.
***Incorporated by reference from Granite State Bankshares, Inc.,
Form 8-K, Exhibits 2.1 and 2.2, filed on December 2, 1991.
****See Part I, Item 1(a) and Item 1 (c)(5)(N) of Form 10-KSB.
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Granite State Bankshares, Inc.,
the registrant, has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GRANITE STATE BANKSHARES, INC.
/s/ Charles W. Smith
Dated : March 27, 1997 ----------------------
By: Charles W. Smith
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934 this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Charles W. Smith 3/27/97 Chief Executive Officer
- -------------------- (Principal Executive Officer)
Charles W. Smith and Chairman of the Board
/s/ William G. Pike 3/27/97 Executive Vice President
- ------------------- and Chief Financial Officer
William G. Pike (Principal Financial and
Accounting Officer)
/s/ James L. Koontz 3/27/97 Director
- -------------------
James L. Koontz
/s/ Jane B. Reynolds 3/27/97 Director
- --------------------
Jane B. Reynolds
/s/ William Smedley V 3/27/97 Director
- ---------------------
William Smedley V
<PAGE> 29
/s/ C. Robertson Trowbridge 3/27/97 Director
- ---------------------------
C. Robertson Trowbridge
/s/ Philip M. Hamblet 3/27/97 Director
- ---------------------
Philip M. Hamblet
/s/ James C. Wirths III 3/27/97 Director
- -----------------------
James C. Wirths III
<PAGE> 30
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
EXHIBIT 3.2
BYLAWS
AMENDED AND RESTATED
BY-LAWS OF
GRANITE STATE BANKSHARES, INC.
ARTICLE I. HOME OFFICE
The home office of Granite State Bankshares, Inc. (the "Company") shall be
in the City of Keene, Cheshire County, State of New Hampshire.
ARTICLE II. STOCKHOLDERS
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the corporate headquarters of the Company or at
such other place in the State of New Hampshire as the board of directors may
determine.
SECTION 2. Annual Meeting. A meeting of the stockholders of the Company
for the election of directors and for the transaction of any other business of
the Company shall be held annually within 120 days after the end of the
Company's fiscal year at such date and time within such 120 day period as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders,
relating to changes in control of the Company or amendments to its charter, may
be called at any time only by or upon direction of the board of directors of the
Company. Special meetings for any other purpose, unless otherwise prescribed by
applicable law or regulation may be called at any time by the chairman of the
board, the president, or a majority of the board of directors and shall be
called by the chairman of the board, the president, or the secretary upon the
written request of the holders of not less than one-tenth of all the outstanding
capital stock of the Company entitled to vote at the meeting. Such written
request shall state the purpose or purposes of the meeting and shall be
delivered at the corporate headquarters of the Company addressed to the chairman
of the board, the president or the secretary.
Amendment or repeal of this Section 3 of this Article II or the adoption
of any provision inconsistent with this Section 3 of this Article II shall be
permitted only by the affirmative vote of the holders of 80% or more of the
total votes eligible to be cast at a legal meeting, voting together as a single
class.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by applicable law or regulation or these bylaws. The
board of directors shall designate, when present, either the chairman of the
board or president to preside at such meetings.
SECTION 5. Notice of Meetings. Written notice stating the place, day and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be delivered not less than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, the secretary or the directors calling the meeting, to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the U.S. mail,
addressed to the stockholder at his address as it appears on the stock transfer
books or records of the Company as of the record date prescribed in Section 6 of
this Article II, with postage thereon prepaid. When any stockholders' meeting,
either annual or special, is adjourned for thirty days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. It shall
not be necessary to give any notice of the time and place of any meeting
adjourned for less than thirty days or of the business to be transacted thereat,
other than an announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than 60 days and, in case of a meeting of stockholders, not less than
20 days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 7. Voting Lists. The officer or agent having charge of the stock
transfer books for shares of the Company shall make, at least twenty days before
each meeting of the stockholders, a complete list of the stockholders entitled
to vote at such meeting, or any adjournment thereof, arranged in alphabetical
order, with the address of and the number of shares held by each, which list
shall be kept on file at the corporate headquarters of the Company and shall be
subject to inspection by any stockholder at any time during usual business
hours, for a period of 20 days prior to such meeting. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any stockholder during the whole time of the meeting. The
original stock transfer book shall be prima facie evidence as to who are the
stockholders entitled to examine such list or transfer books or to vote at any
meeting of stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the Company
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The stockholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution except for a proxy coupled
with an interest.
SECTION 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the Company to the contrary, at any meeting of the stockholders of
the Company, any one or more of such stockholders may cast, in person or by
proxy, all votes to which such ownership is entitled. In the event an attempt is
made to cast conflicting votes, in person or by proxy, by the several persons in
whose names shares of stock stand, the vote or votes to which those persons are
entitled shall be cast as directed by a majority of those holding such stock and
present in person or by proxy at such meeting, but no votes shall be cast for
such stock if a majority cannot agree.
SECTION 11. Voting Shares by Certain Holders. Shares standing in the name
of another corporation may be voted by any officer, agent or proxy as the bylaws
of such corporation may prescribe, or, in the absence of such provision, as the
board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a person holding a power under a trust instrument may be
voted by him, either in person or by proxy, but no such person shall be entitled
to vote shares held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer thereof into his name if authority to do so is contained in
an appropriate order of the court or other public authority by which such
receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Company, nor shares
held by another corporation, if a majority of the shares entitled to vote the
election of directors of such other corporation are held by the Company, shall
be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
SECTION 12. Inspectors of Election. In advance of any meeting of
stockholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment
thereof. The number of inspectors shall be either one or three. If the board of
directors so appoints either one or three such inspectors that appointment shall
not be altered at the meeting. If inspectors of election are not so appointed,
the chairman of the board or the president may, and on the request of not less
than ten percent of the votes represented at the meeting shall, make such
appointment at the meeting. If appointed at the meeting, the majority of the
votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or refuses
to act, the vacancy may be filled by appointment by the board of directors in
advance of the meeting by the chairman of the board of the president.
Unless otherwise prescribed by applicable law or regulation, the duties of
such inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 13. Nominating Committee. The board of directors shall act as
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by stockholders are
made in writing and delivered to the secretary of the Company at least 120 days
in advance of the date of the Company's proxy statement released to stockholders
in connection with the previous year's annual meeting except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
delayed by more than 30 calendar days from the date of the previous year's proxy
statement, any such nomination shall be stated in writing and filed with the
secretary of the Company at least 60 days in advance of the annual meeting.
Ballots bearing the names of all the persons nominated by the nominating
committee and by stockholders shall be provided for use at the annual meeting.
If the nominating committee shall fail or refuse to act at least 20 days prior
to the annual meeting, nominations for directors may be made at the annual
meeting by any stockholder entitled to vote and shall be voted upon.
SECTION 14. New Business. Any new business to be taken up at the annual
meeting other than new business proposed by the directors of the Company shall
be stated in writing and filed with the secretary of the Company at least 120
days in advance of the date of the Company's proxy statement released to
stockholders in connection with the previous year's annual meeting except that
if no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than 30 calendar days from the date of the
previous year's proxy statement, any new business shall be stated in writing and
filed with the secretary of the Company at least 60 days in advance of the
annual meeting, and all business so stated, proposed and filed shall be
considered at the annual meeting, but no other proposal other than new business
proposed by the directors of the Company shall be acted upon at the annual
meeting. Any stockholder may make any other proposal at the annual meeting and
the same may be discussed and considered, but unless stated in writing and filed
with the secretary at least 120 days in advance of the meeting, as provided
above, such proposal shall be laid over for action at any adjourned, special or
annual meeting of the stockholders taking place thirty days or more thereafter.
This provision shall not prevent the consideration and approval or disapproval
at the annual meeting of reports of officers, directors and committees, but in
connection with such reports, no new business other than new business proposed
by the directors of the Company, shall be acted upon at such annual meeting
unless stated and filed as herein provided.
ARTICLE III. BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Company shall
be under the direction of its board of directors. The board of directors shall
annually elect a chairman of the board and a president from among its members
and shall designate, when present, either the chairman of the board or the
president to preside at its meetings.
SECTION 2. Number and Term. The number of Directors who shall constitute
the board shall be such number as the board of directors shall from time to time
have designated by resolution, except in the absence of such designation the
number shall be seven, and the board shall be divided into three classes as
nearly equal in number as possible. The stockholders of the company shall have
no power to amend the number of directors of the Company; this power is
expressly reserved to the Board of Directors, as provided in the Company's
Articles of Incorporation. The members of each class shall be elected for a term
of three years and until their successors are elected and qualified. One class
shall be elected by ballot annually.
SECTION 3. Qualification. Each director shall at all times be the
beneficial owner of shares of capital stock of the Company with a fair market
value, as of the date of purchase of $1000.
SECTION 4. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this bylaw immediately after, and at the
same place as, the annual meeting of stockholders. The board of directors may
provide, by resolution, the time and place, within the State of New Hampshire,
for the holding of additional regular meetings without other notice than such
resolution.
SECTION 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place, within the State of New Hampshire,
as the place for holding any special meeting of the board of directors called by
such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or in similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person but shall not constitute attendance for the
purpose of compensation pursuant to Section 13 of this Article III.
SECTION 6. Notice. Written notice of any special meeting shall be given to
each director at least two days previously thereto delivered personally or by
telegram or at least five days previously thereto delivered by mail at the
address at which such director has furnished to the Company. Such notice shall
be deemed to be delivered when deposited in the U.S. mail so addressed, with
postage thereon prepaid if mailed or when delivered to the telegraph Company if
sent by telegram. Any director may waive notice of any meeting by a writing
filed with the secretary. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
SECTION 7. Quorum. A majority of the number of directors fixed by Section
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in the
same manner as prescribed by Section 6 of this Article III.
SECTION 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by applicable law or
regulations or by these bylaws.
SECTION 9. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 10. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the corporate headquarters of the Company,
addressed to the chairman of the board or the president. Unless otherwise
specified therein, such resignation shall take effect upon receipt thereof by
the chairman of the board or the president. Any director who has been absent
from one-third or more of the meetings of the board of directors during the
preceding calendar year, unless such absences are for good cause shown, shall
not accept reelection as a director at the next annual meeting of stockholders.
SECTION 11. Removal. The directors of the Company may, individually or as
a group, be removed from their positions as directors before the expiration of
their respective terms only for cause. "Cause" shall be defined as breach of
fiduciary duty involving personal dishonesty or intentional failure to perform
stated duties as a director, which results in loss to the Company or willful
violation of any law, rule, regulation or final cease-and-desist order which
results in substantial loss to the Company.
Amendment or repeal of this Section 11 of this Article III or the adoption
of any provision inconsistent with this Section 11 of this Article III shall be
permitted only by the affirmative vote of the holders of either 80% or more of
the directors of the Company, other than such directors who are the subject of
the removal action, or 80% of the total votes eligible to be cast at a legal
meeting, voting together as a single class.
SECTION 12. Vacancies. Any vacancy occurring in the board of directors may
be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election of directors by
the stockholders. Any directorship to be filled by reason of an increase in the
number of directors may be filled by election by the board of directors for a
term of office continuing only until the next election of directors by the
stockholders.
SECTION 13. Compensation. Directors, as such, may receive a stated salary
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
actual attendance at committee meetings as the board of directors may determine.
SECTION 14. Presumption of Assent. A director of the Company who is
present at a meeting of the board of directors at which action on any Company
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Company within five days
after the date he receives a copy of the minutes of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
SECTION 15. Age Limitations on Directors. No person shall be eligible to
serve on the Board of Directors after attaining his or her seventieth (70th)
birthday.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Appointment. The board of directors, by resolution adopted by a
majority of the full board, may designate the chief executive officer and two or
more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority thereto shall not operate to relieve the board of directors, or any
director, of any responsibility imposed by law or regulation.
SECTION 2. Authority. The executive committee, when the board of directors
is not in session, shall have and may exercise all of the authority of the board
of directors except to the extent, if any, that such authority shall be limited
by the resolution appointing the executive committee; and except also that the
executive committee shall not have the authority of the board of directors with
reference to the amendment of the charter or bylaws of the Company, or
recommending to the stockholder's a plan of merger, consolidation, or
conversion; the sale, lease or other disposition of all or substantially all of
the property and assets of the Company otherwise than in the usual and regular
course of its business; a voluntary dissolution of the corporation; a revocation
of any of the foregoing; or the approval of a transaction in which any member of
the executive committee, directly or indirectly, has any material beneficial
interest.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his designation and
until his successor is designated as a member of the executive committee.
SECTION 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by a member thereof upon not less than one day's notice stating the
place, date and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
SECTION 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
SECTION 6. Action Without a Meeting. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
SECTION 7. Vacancies. Any vacancy in the executive committee may only be
filled by a resolution adopted by a majority of the full board of directors.
SECTION 8. Resignations and Removal. Any member of the executive committee
may be removed at any time with or without cause by resolution adopted by a
majority of the full board of directors. Any member of the executive committee
may resign from the executive committee at any time by giving written notice to
the president or secretary of the Company. Unless otherwise specified thereon,
such resignation shall take effect upon receipt. The acceptance of such
resignation shall not be necessary to make it effective.
SECTION 9. Procedure. The presiding officer of the executive committee
shall be the chairman and chief executive officer of the Company. The executive
committee may fix its own rules of procedure which shall not be inconsistent
with these bylaws. It shall keep regular minutes of its proceedings and report
the same to the board of directors for its information at the meeting thereof
held next after the proceedings shall have been taken.
SECTION 10. Other Committees. The board of directors may by resolution
establish an audit committee, a loan committee, an investment committee, or
other committees composed of directors as they may determine to be necessary or
appropriate for the conduct of the business of the Company and may prescribe the
duties, constitution and procedures thereof.
ARTICLE V. OFFICERS
SECTION 1. Positions. The officers of the Company shall be a president,
one or more vice presidents, a secretary and a treasurer, each of whom shall be
elected by the board of directors. The board of directors may also designate the
chairman of the board as an officer. The president shall be the chief executive
officer, unless the board of directors designates the chairman of the board as
chief executive officer. The president shall be a director of the Company. The
offices of the secretary and treasurer may be held by the same person and a vice
president may also be either the secretary or the treasurer. The board of
directors may designate one or more vice presidents as executive vice president
or senior vice president. The board of directors may also elect or authorize the
appointment of such other officers as the business of the Company may require.
The officer shall have such authority and perform such duties as the board of
directors may from time to time authorize or determine. In the absence of action
by the board of directors, the officers shall have such powers and duties as
generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Company shall
be elected annually at the meeting of the board of directors held after each
annual meeting of the stockholders. If the election of officers is not held at
such meeting, such election shall be held as soon thereafter as possible. Each
officer shall hold office until his successor shall have been duly elected and
qualified or until his death or until he shall resign or shall have been removed
in the manner hereinafter provided. Election or appointment of an officer,
employee or agent shall not of itself create contract rights. The board of
directors may authorize the Company to enter into an employment contract with
any officer in accordance with applicable law and regulations; but no such
contract shall impair the right of the board of directors to remove any officer
at any time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the Company shall be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contract rights, if any, of the person so removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification of otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors.
ARTICLE VI. INDEMNIFICATION
To the fullest extent permitted by New Hampshire law, the Company shall
indemnify each director and officer of the Company (and his heirs, executors and
administrators) against all expenses and liabilities reasonably incurred by him
or her in connection with or arising out of any action, suit or proceeding in
which he or she may be involved by reason of his or her being or having been a
director or officer of the Company (whether or not he or she continues to be a
director or officer at the time of incurring such expenses or liabilities), such
expenses and liabilities to include, but not be limited to, judgments, court
costs and attorneys' fees and the cost of reasonable settlements. The Company
shall not, however, indemnify such director or officer with respect to matters
at to which he or she shall be finally adjudged in any such action, suit or
proceeding to have been liable for willful misconduct in the performance of his
or her duties as such director of officer. In the event that a settlement or
compromise is effected, indemnification may be had only if the board of
directors shall have determined that such settlement or compromise is in the
best interest of the Company and that such director or officer is not liable for
willful misconduct in the performance of his or her duties with respect to such
matters, and if the board of directors shall have adopted a resolution approving
such settlement or compromise. The foregoing right of indemnification shall not
be exclusive of other rights to which any director or officer may be entitled as
a matter of law.
ARTICLE VII. CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. To the extent permitted by applicable law or
regulation and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the Company to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Company. Such
authority may be general or confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the Company
and no evidence of indebtedness shall be issued in its name unless authorized by
the board of directors or an appropriate committee thereof. Such authority may
be general or confined to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Company shall be signed by one or more officers, employees or agents of the
Company in such manner as shall from time to time be determined by the board of
directors.
SECTION 4. Deposits. All funds of the Company not otherwise employed shall
be deposited from time to time to the credit of the Company in any of its duly
authorized depositories as the board of directors may elect.
ARTICLE VIII. CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares. Certificates representing shares of
capital stock of the Company shall be in such form as shall be determined by the
board of directors; subject to applicable law and regulations. Such certificates
shall be signed by the chief executive officer or by any other officer of the
Company authorized by the board of directors, attested by the secretary or an
assistant secretary, and sealed with the corporate seal or a facsimile thereof.
The signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar,
other than the Company itself or one of its employees. Each certificate for
shares of capital stock shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares are issued, with the
number of shares and date of issue, shall be entered on the stock transfer books
of the Company. All certificates surrendered to the Company for transfer shall
be canceled and no new certificate shall be issued until the former certificate
for a like number of shares shall have been surrendered and canceled, except
that in case of a lost or destroyed certificate, a new certificate may be issued
therefore upon such terms and indemnity to the Company as the board of trustees
may prescribe.
SECTION 2. Transfer of Shares. Transfer of shares of capital stock of the
Company shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Company. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Company shall be deemed by the Company to be the
owner thereof for all purposes.
ARTICLE IX. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Company shall end on the 31st day of December of
each year. The Company shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the board of directors. The appointment of such accountants shall be subject to
annual ratification by the stockholders.
ARTICLE X. DIVIDENDS
Subject to the terms of the Company's Articles of Incorporation and
applicable law and regulation, the board of directors may, from time to time,
declare, and the Company may pay, dividends on its outstanding shares of capital
stock.
ARTICLE XI. CORPORATE SEAL
The board of directors shall provide a Company seal which shall be two
concentric circles between which shall be the name of the Company. The year of
incorporation or an emblem may appear in the center.
ARTICLE XII. AMENDMENTS
These bylaws may be amended at any time by a majority vote of the full
board of directors, or by a majority vote of the votes cast by the stockholders
of the Company at any legal meeting, except as otherwise provided herein or in
the articles of incorporation of the company.. Notwithstanding the foregoing,
any amendment, addition, alteration, change or repeal of Article II, Section 3
and Article III, Section 11 of these bylaws, or the adoption of any provision
inconsistent with Article II, Section 3 and Article III, Section 11 of the
bylaws, shall be made only if such amendment, addition, alteration, change,
repeal or adoption of an inconsistent provision is approved by the holders of
80% or more of the total votes eligible to be cast at a legal meeting, voting
together as a single class. Any amendment acted upon in the manner provided in
this Article XII, shall be effective upon adoption.
EXHIBIT 10.3
GRANITE STATE BANKSHARES, INC.
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
WHEREAS, Charles W. Smith ("Executive") and the Granite State
Bankshares, Inc. (the "Holding Company") are parties to an employment
agreement made effective as of June 30, 1986 (the "Agreement"); and
WHEREAS, there is an accelerating trend of consolidation among
companies within the banking industries; and
WHEREAS, the Agreement is intended to provide certain benefits to
Executive in the event of a change in control of the Holding Company; and
WHEREAS, tax law provisions relating to "golden parachute payments"
could have the effect of reducing the benefits otherwise provided to
Executive under the Agreement as a result of a change in control of the
Holding Company; and
WHEREAS, the Board believes that it is in the best interests of the
Holding Company and its shareholders that the Agreement be amended in order
to provide the benefits originally intended to be provided under the
Agreement to Executive in the event of a change in control of the Holding
Company, without any reduction because of tax code "penalties" or excise
taxes relating to a change in control; and
WHEREAS, the Holding Company and the Executive also desire to amend
the Agreement in the manner set forth herein for the purpose of providing
further incentive to the Executive to achieve successful results in the
management and the operation of the Holding Company.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree to the following amendment to the Agreement:
1. Paragraph (j) of Section 5 shall be added to read as follows:
(h) Notwithstanding any other provisions contained in this
Agreement, in each calendar year that Executive is entitled
to receive payments or benefits under the provisions of
this Section 5, the independent accountants of the Holding
Company shall determine if an excess parachute payment (as
defined in Section 4999 of the Internal Revenue Code of
1986, as amended, and any successor provision thereto, (the
"Code")) exists. Such determination shall be made after
taking any reductions permitted pursuant to Section 280G of
the Code and the regulations thereunder. Any amount
determined to be an excess parachute payment after taking
into account such reductions shall be hereafter referred to
as the "Initial Excess Parachute Payment". As soon as
practicable after a Change in Control, the Initial Excess
Parachute Payment shall be determined. Upon the Date of
Termination following a Change in Control, the Holding
Company shall pay Executive, subject to applicable
withholding requirements under applicable state or federal
law an amount equal to:
(i) twenty (20) percent of the Initial Excess
Parachute Payment (or such other amount equal to
the tax imposed under Section 4999 of the Code),
and
(ii) such additional amount (tax allowance) as may be
necessary to compensate Executive for the payment
by Executive of state and federal income and
excise taxes on the payment provided under Clause
(i) and on any payments under this Clause (ii).
In computing such tax allowance, the payment to be
made under Clause (i) shall be multiplied by the
"gross up percentage" ("GUP"). The GUP shall be
determined as follows:
Tax Rate
GUP = ---------------
1- Tax Rate
The Tax Rate for purposes of computing the GUP
shall be the highest marginal federal and state
income and employment-related tax rate applicable
to the Executive in the year in which the payment
under Clause (i) is made.
Notwithstanding the foregoing, if it shall subsequently be
determined in a final judicial determination or a final
administrative settlement to which Executive is a party
that the excess parachute payment as defined in Section
4999 of the Code, reduced as described above, is different
from the Initial Excess Parachute Payment (such different
amount being hereafter referred to as the "Determinative
Excess Parachute Payment") then the Holding Company's
independent accountants shall determine the amount (the
"Adjustment Amount") the Executive must pay to the Holding
Company or the Holding Company must pay to the Executive in
order to put the Executive (or the Holding Company, as the
case may be) in the same position as the Executive (or the
Holding Company, as the case may be) would have been if the
Initial Excess Parachute Payment had been equal to the
Determinative Excess Parachute Payment. In determining the
Adjustment Amount, the independent accountants shall take
into account any and all taxes (including any penalties and
interest) paid by or for Executive or refunded to Executive
or for Executive's benefit. As soon as practicable after
the Adjustment Amount has been so determined, the Holding
Company shall pay the Adjustment Amount to Executive or the
Executive shall repay the Adjustment Amount to the Holding
Company, as the case may be.
In each calendar year that Executive receives payments or
benefits under the provisions of this Section 5, Executive
shall report on his state and federal income tax returns
such information as is consistent with the determination
made by the independent accountants of the Holding Company
as described above. The Holding Company shall indemnify
and hold Executive harmless from any and all losses, costs
and expenses (including without limitation, reasonable
attorney's fees, interest, fines and penalties) which
Executive incurs as a result of so reporting such
information. Executive shall promptly notify the Holding
Company in writing whenever the Executive receives notice
of the institution of a judicial or administrative
proceeding, formal or informal, in which the federal tax
treatment under Section 4999 of the Code of any amount paid
or payable under this Agreement is being reviewed or is in
dispute. The Holding Company shall assume control at its
expense over all legal and accounting matters pertaining to
such federal tax treatment (except to the extent necessary
or appropriate for Executive to resolve any such proceeding
with respect to any matter unrelated to amounts paid or
payable pursuant to this contract) and Executive shall
cooperate fully with the Holding Company in any such
proceeding. The Executive shall not enter into any
compromise or settlement or otherwise prejudice any rights
the Holding Company may have in connection therewith
without prior consent to the Holding Company.
2. All other terms and provisions of the Agreement shall remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, Granite State Bankshares, Inc. has caused this
Amendment No. 1 to the Agreement to be executed and its seal to be affixed
hereunto by its duly authorized officer, and Executive has signed this
Amendment No. 1, on the 12th day of August, 1996.
ATTEST: [SEAL] GRANITE STATE BANKSHARES, INC.
/s/ Charles B. Paquette By: /s/ William Smedley
[SEAL]
WITNESS:
/s/ Stacey W. Cole /s/ Charles W. Smith
Executive
EXHIBIT 10.4
FORM OF
SPECIAL TERMINATION AGREEMENT
This AGREEMENT is made effective as of November 9, 1996 by
and between Granite State Bankshares, Inc. (the "Company"), a corporation
organized under the laws of the State of New Hampshire, with its office at
122 West Street, Keene, New Hampshire, and ("Executive").
The term "Bank" refers to Granite Bank, the wholly-owned subsidiary of the
Company.
WHEREAS, the Company recognizes the substantial contribution Executive
has made to the Company and the Bank and wishes to provide him with further
incentive by protecting his position therewith for the period and under the
circumstances provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
position of ,
positions of substantial responsibility;
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36)
full calendar months thereafter. Commencing on the first anniversary date
of this Agreement and continuing at each anniversary date thereafter, the
Agreement shall renew for an additional year such that the remaining term
shall be three (3) years unless written notice is provided to Executive at
least ten (10) days and not more than twenty (20) days prior to any such
anniversary date, in which event this Agreement shall cease at the end of
thirty-six (36) months following such anniversary date.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the Company (as
herein defined) followed at any time during the term of this Agreement by
the voluntary or involuntary termination of Executive's employment by the
Bank or the Company, other than for Cause, as defined in Section 2(c)
hereof, the provisions of Section 3 shall apply. Upon the occurrence of a
Change in Control, Executive shall have the right to elect to voluntarily
terminate his employment at any time during the term of this Agreement and
receive the benefits specified in Section 3 of this Agreement.
(b) A "Change in Control" of the Bank or the Company shall mean a
change in control of a nature that: (i) would be required to be reported in
response to Item 1(a) of the current report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the
Bank or the Company within the meaning of the Change in Bank Control Act and
the Rules and Regulations promulgated by the Board of Governors of the
Federal Reserve System (the "FRB"), as in effect on the date hereof; or
(iii) without limitation, such a Change in Control shall be deemed to have
occurred at such time as (a) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities, or makes an offer to purchase securities, of the Company
representing 20% or more of the combined voting power of the Company's
outstanding securities, except for any securities purchased by an employee
stock ownership plan established by the Company or the Bank and approved by
the Incumbent Board (as defined below); or (b) individuals who constitute
the Board of Directors of the Company on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the date hereof
whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by the Company's Nominating
Committee, shall be, for purposes of this clause (b), considered as though
he were a member of the Incumbent Board; or (c) a plan of reorganization,
merger, consolidation or sale of all or substantially all the assets of the
Bank or Company or similar transaction occurs in which the Bank or the
Company is not the resulting entity; or (d) a proxy statement shall be
distributed soliciting proxies from stockholders of the Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of
the Company or Bank with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are exchanged for or converted into cash or property or
securities not issued by the Bank or the Company shall be distributed; or
(e) a tender offer is made for 20% or more of the voting securities of the
Bank or Company then outstanding.
(c) Executive shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon Termination of Cause. The term
"Termination for Cause" shall mean termination upon intentional failure to
perform stated duties, personal dishonesty which results in loss to the
Company or one of its affiliates, a willful violation of any law, rule,
regulation (other than traffic violations or similar offenses) or final
cease and desist order which results in substantial loss to the Company or
one of its affiliates, or any material breach of this Agreement. For
purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" or "intentional" unless done, or omitted to be done, not
in good faith and without reasonable belief that the action or omission was
in the best interest of the Company or its affiliates.
Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered
to him a copy of a resolution duly adopted by the affirmative vote of not
less than three-fourths of the members of the Board at a meeting of the
Board called and held for that purpose (after reasonable notice to Executive
and an opportunity for him, together with counsel, to be heard before the
Board), finding that in the good faith opinion of the Board, Executive was
guilty of conduct justifying Termination for Cause and specifying the
particulars thereof in detail. Any stock options or limited rights granted
to the Executive under any stock option plan or any unvested awards granted
under any other stock benefit plan of the Bank, the Company or any
subsidiary thereof, shall become null and void effective upon Executive's
receipt of Notice of Termination for Cause pursuant to Section 4 hereof and
shall not be exercisable by Executive at any time subsequent to such
Termination for Cause, unless it is determined in arbitration pursuant to
Section 4 hereof that Cause for the termination of Executive's did not
exist, in which event such options shall be exercisable by Executive for a
period of not less than three months from the arbitration determination.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary
termination of the Executive's employment, other than for Termination for
Cause, the Company shall pay to Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be,
as severance pay or liquidated damages, or both, a sum equal to three (3)
times the average of the Executive's three preceding years' annual base
salary from the Bank and the Company, including the amount of any salary
deferred by Executive pursuant to any deferred compensation arrangement. At
the election of the Executive, which election is to be made within thirty
(30) days of the date of this Agreement, and during the month of January in
each year, and which election is irrevocable for the calendar year in which
it is made, payments under Section 3 of this Agreement shall be made in a
lump sum within thirty (30) days of the date of severance of Executive's
employment, or paid in equal monthly installments during the thirty-six (36)
months following the Executive's termination. In the event that no election
is made, payment to the Executive will be made on a monthly basis during the
remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the
Company followed at any time during the term of this Agreement by the
Executive's voluntary or involuntary termination of employment, other than
for Termination for Cause, the Company shall cause to be continued life,
medical, dental and disability coverage substantially identical to the
coverage maintained by the Bank for the Executive prior to his severance.
Such coverage and payments shall cease upon expiration of thirty-six (36)
months after termination of employment.
(c) Notwithstanding the preceding paragraphs of this Section 3, in
the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive under said paragraph (the "Termination Benefits")
would be deemed to include an "excess parachute payment" under
Section 280G of the Internal Revenue Code of 1986 (the "Code")
or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to three (3) times Executive's
"base amount", as determined in accordance with said Section
280G, and the Non-Triggering Amount would be greater than the
aggregate value of the Termination Benefits (without such
reduction) minus the amount of tax required to be paid by
Executive thereon by Section 4999 of the Code, then the
Termination Benefits shall be reduced to the Non-Triggering
Amount. The allocation of the reduction required by the
preceding paragraphs of this Section 3 shall be determined by
the Executive.
(d) Upon the occurrence of a Change in Control followed by the
voluntary or involuntary termination of Executive's employment, other than
for Cause, the Company shall pay, or cause the Bank to pay, Executive an
Accelerated Retirement Benefit. Such benefit shall be the greater of (A)
fifty percent (50%) of the Accelerated Retirement Benefit described below,
or (b) Executive's retirement benefit payable under the qualified pension
plan of the Bank, plus any benefit payable from any qualified or non-
qualified retirement plans or programs maintained by the Bank other than
said qualified pension plan, at his actual age upon severance of employment,
whichever is greater. The Accelerated Retirement Benefit shall be a benefit
calculated pursuant to the provisions of the Bank's qualified pension plan
at the time of severance and shall consist of a benefit payable at age
sixty-five (65) and assuming Executive had attained age sixty-five (65) and
worked for the Bank from his date of hire to age sixty-five (65). At the
discretion of Executive, upon an election pursuant to Section 3(a) hereof,
such payment may be made in a lump sum within 30 days of the date of
severance of Executive's employment, or paid, on a pro rata basis, semi-
monthly during the thirty-six (36) months following Executive's termination.
(e) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 USC
Section 1828(k) and any regulations promulgated thereunder.
4. NOTICE OF TERMINATION.
Any purported termination by the Company, or by the Executive shall be
communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. "Date of Termination" shall
mean the date specified in the Notice of Termination (which, in the case of
a Termination for Cause, shall not be less than thirty (30) days from the
date such Notice of Termination is given). If within thirty (30) days after
any Notice of Termination for Cause is given, the Executive notifies the
Company that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined,
either by written agreement of the parties, by a binding arbitration award,
and provided further that the Date of Termination shall be extended by a
notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the Company
will continue to pay the Executive his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to,
annual base salary) and continue him as a participant in all compensation,
benefit and insurance plans in which he was participating when the notice of
dispute was given, until the dispute is finally resolved in accordance with
the Agreement. Amounts and benefits paid under this Section pending
resolution of the dispute in arbitration shall be offset against any amounts
and benefits that are determined to be due Executive under this Agreement as
a result of the termination of his employment. Nothing herein shall be
construed as limiting the right of the Company or the Bank to terminate the
employment of the Executive at any time and for any reason and to pay the
Executive the benefits set forth in Section 3 of this Agreement.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in
this Agreement shall be paid in cash or check from the general funds of the
Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Company and Executive,
except that this Agreement shall not affect or operate to reduce any benefit
or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy, or similar process or assignment by operation
of law, and any attempt, voluntary or involuntary, to affect any such action
shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Executive, the Company and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be
deemed a continuing waiver unless specifically stated therein, and each such
waiver shall operate only as to the specific term or condition waived and
shall not constitute a waiver of such term or condition for the future or as
to any act other than that specifically waived.
9. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
10. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
11. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of New Hampshire,
unless otherwise specified herein.
12. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within fifty (50) miles from Keene, New Hampshire, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction;
provided, however, that Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with
this Agreement.
13. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to
any dispute or question of interpretation relating to this Agreement shall
be paid or reimbursed by the Company if Executive is successful pursuant to
arbitration or settlement.
14. INDEMNIFICATION.
The Company shall provide the Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, and shall indemnify the
Executive (and his heirs, executors and administrators) to the fullest
extent permitted under New Hampshire law and as provided in the Company's
certificate of incorporation against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a
director or officer at the time of incurring such expenses or liabilities),
such expenses and liabilities to include, but not be limited to, judgments,
court costs and attorneys' fees and the cost of reasonable settlements.
15. SIGNATURES.
IN WITNESS WHEREOF, Granite State Bankshares, Inc. has caused this
Agreement to be executed by its duly authorized officer, and Executive has
signed this Agreement, as of the date first above written.
Granite State Bankshares, Inc.
By: /s/ William Smedley
/s/ Executive
Executive
EXHIBIT 11
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
Calculations of Earnings Per Common and Common Equivalent
Share and Earnings Per Common Share Assuming Full Dilution
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
--------------------- --------------------- ---------------------
Common and Common and Common and
Common Fully Common Fully Common Fully
Equivalent Diluted Equivalent Diluted Equivalent Diluted
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 3,780 $ 3,780 $ 3,435 $ 3,435 $ 2,823 $ 2,823
========= ========= ========= ========= ========= =========
Weighted average number
of shares outstanding 1,994 1,994 2,066 2,066 2,138 2,138
Adjustments:
Assumed issuance under
stock option plan 118 125 110 117 91 95
--------- --------- --------- --------- --------- ---------
2,112 2,119 2,176 2,183 2,229 2,233
========= ========= ========= ========= ========= =========
Earnings per
Common share $ 1.79 $ 1.78 $ 1.58 $ 1.57 $ 1.27 $ 1.26
========= ========= ========= ========= ========= =========
</TABLE>
EXHIBIT 13
MANAGMENT'S DISCUSSION AND ANALYSIS
GENERAL
Granite State Bankshares, Inc. ("Granite State" or the "Company") is
a single-bank holding company which was formed in 1986 to acquire all of
the stock of the Granite Bank (the "subsidiary bank") upon its conversion
from a mutual savings bank to a state-chartered guaranty (stock) savings
bank. Since that time, the Company has acquired the Durham Trust Company,
First Northern Co-operative Bank, First National Bank of Peterborough and
the Granite Bank of Amherst. The acquired banks have all been merged into
Granite Bank. Additionally, during 1991, Granite Bank converted from a
state-chartered guaranty (stock) savings bank to a New Hampshire state-
chartered commercial bank. This discussion of the financial condition and
results of operations of the Company should be read in conjunction with
the financial statements and supplemental financial data contained
elsewhere in this report.
The subsidiary bank has been and continues to be a community
oriented commercial bank offering a variety of financial services. The
principal business of the subsidiary bank consists of attracting deposits
from the general public and underwriting loans secured by residential and
commercial real estate and other loans. The subsidiary bank also
originates fixed rate residential real estate loans for sale in the
secondary mortgage market. The subsidiary bank has nine full service
offices and an additional thirteen remote automatic teller locations. The
subsidiary bank is a full service community bank with a diversified
lending operation that services Cheshire, Hillsborough, Strafford and
Rockingham counties, New Hampshire.
The subsidiary bank's deposits are primarily insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
("FDIC"), with the remaining portion of the subsidiary bank's deposits
(approximately $35.6 million or 11.71% of total deposits at December 31,
1996) being OAKAR deposits, which are deposits purchased from institutions
previously insured by the Savings Association Insurance Fund ("SAIF") of
the FDIC. These deposits are still insured by the SAIF. As a result of the
foregoing, the subsidiary bank is subject to regulation by the FDIC. The
Company, as a bank holding company, is subject to regulation by the
Federal Reserve Board ("FRB").
Financial institutions in general, including the Company, are
significantly affected by economic conditions, competition and the
monetary and fiscal policies of the Federal government. Lending activities
are influenced by the demand for and supply of housing and local economic
activity, competition among lenders, the interest rate conditions and
funds availability. Deposit balances and cost of funds are influenced by
prevailing market rates on competing investments, customer preference and
the levels of personal income and savings in the subsidiary bank's primary
market area.
FINANCIAL CONDITION
Consolidated assets at December 31, 1996 were $370.4 million, up
$24.0 million or 6.93% from $346.4 million at December 31, 1995.
Interest bearing deposits in the Federal Home Loan Bank of Boston
("FHLBB") were $18.0 million at December 31, 1996 and $24.2 million at
December 31, 1995. The decrease of $6.2 million or 25.77% was invested
into higher yielding 3 to 5 year fixed income securities.
The Company follows Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Accordingly, the
Company classifies its investments in debt and equity securities as
securities held to maturity, securities available for sale or trading
securities. At December 31, 1996, securities held to maturity were $9.5
million compared to $0 at December 31, 1995. Securities available for sale
were $99.4 million at December 31, 1996 and $95.0 million at December 31,
1995. The total of securities held to maturity and securities available
for sale increased $13.9 million or 14.64% and was the result of investing
the decrease of $6.2 million in interest bearing deposits in the FHLBB
into higher yielding 3 to 5 year fixed income securities, as well as
investing the portion of the funds received from increases in interest
bearing liabilities that were not needed to fund loan growth. There were
no securities classified as trading securities at December 31, 1996 and
December 31, 1995.
At December 31, 1996 the net unrealized gains on securities
available for sale, net of related tax effects were $2.0 million, compared
to $1.6 million at December 31, 1995. These net unrealized gains are shown
as a separate component of stockholders' equity.
At December 31, 1996, the weighted average life of the Company's
investments in debt securities is approximately 27 months compared to 17
months at December 31, 1995; however, actual maturities may differ from
contractual maturities because certain issuers have the right to call
obligations without call penalties.
The subsidiary bank originates fixed rate residential loans for sale
in the secondary mortgage market. Mortgage loans held for sale at December
31, 1996 and 1995 were $1.0 million and $2.0 million, respectively. Loans
originated for sale in the secondary mortgage market during 1996 and 1995
were $27.2 million and $29.2 million, respectively. Loans sold in the
secondary mortgage market were $28.2
<PAGE> 9
million and $27.9 million, respectively. The Company began writing fifteen
year fixed rate loans for portfolio effective July 1, 1996. Such loans had
previously been sold in the secondary mortgage market. The Company continues
to write thirty year fixed rate loans for sale in the secondary mortgage
market. At December 31, 1996 and 1995 the Company serviced loans for others
totaling $174.0 million and $173.0 million, respectively.
Loans outstanding before deductions for unearned income and the
allowance for possible loan losses increased $15.9 million or 8.39% to
$206.3 million at December 31, 1996 from $190.4 million at December 31,
1995. Residential real estate loans and commercial real estate loans were
the areas where the increases occurred. Residential real estate loans
increased $11.0 million or 9.84% to $122.6 million at December 31, 1996
from $111.6 million at December 31, 1995 and commercial real estate loans
increased $5.7 million or 10.94% to $58.3 million at December 31, 1996
from $52.6 million at December 31, 1995. The increase in the residential
real estate loans occurred throughout 1996 as the low interest rate
environment during the latter part of 1995 continued into 1996 and
encouraged borrowers to refinance loans. New home purchases were also
stronger in 1996 than during 1995. Additionally, beginning on July 1,
1996, the Company began writing fifteen year fixed rate loans for
portfolio, which before that date were being sold into the secondary
mortgage market. The increase in commercial real estate loans was a result
of stronger loan demand in the latter part of 1996 as competitive loan
rates became lower encouraging borrowers to refinance their loans. Total
loan originations during 1996 and 1995, were $86.8 million and $62.6
million, respectively. Loan originations for portfolio, excluding loans
originated for sale in the secondary mortgage market during 1996 and 1995
were $59.6 million and $33.4 million, respectively. Loan repayments for
1996 and 1995, were $41.6 million and $33.9 million, respectively. Loans
charged off, net during 1996 and 1995 were $678 thousand and $1.3 million,
respectively. Loans transferred to other real estate owned during 1996 and
1995 amounted to $1.4 million and $1.8 million, respectively.
At December 31, 1996 and 1995 the Company's loan portfolio consisted
of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
--------- ---------
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural............ $ 9,849 $ 10,696
Real estate--residential.......................... 122,561 111,578
Real estate--commercial........................... 58,302 52,555
Real estate--construction and land development.... 3,030 2,676
Installment....................................... 4,488 4,438
Other............................................. 8,109 8,426
----------------------
Total loans................................. 206,339 190,369
Less:
Unearned income................................. (1,860) (2,356)
Allowance for possible loan losses.............. (3,676) (3,704)
----------------------
Net loans................................... $ 200,803 $ 184,309
======================
</TABLE>
The Company's nonperforming assets decreased $955 thousand or 21.27%
from $4.5 million at December 31, 1995 to $3.5 million at December 31,
1996. The New Hampshire economy and the real estate market in the
Company's market areas have stabilized and improved over the last 3 to 4
years and at December 31, 1996 the Company's nonperforming assets have
been reduced to 0.95% of total assets. However, any future deterioration
in the economy or real estate market in the Company's market areas may
adversely impact the quality of the Company's assets in future periods, as
well as its results of operations.
The following table sets forth the Company's nonperforming loans and
other real estate owned at the dates indicated. The Company generally does
not accrue interest on any loans that are 90 days or more past due, unless
the loan is well secured and in the process of collection. At the dates
indicated, all loans delinquent 90 days or more were on nonaccrual status
and therefore considered nonperforming, with the exception of $93 thousand
of loans at December 31, 1996 and $21 thousand of loans at December 31,
1994, all of which were in the process of collection at those dates.
<PAGE> 10
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995 1994
-------- -------- --------
($ In Thousands)
<S> <C> <C> <C>
Nonperforming loans:
Residential real estate $ 1,582 $ 1,341 $ 1,495
Commercial real estate 386 332 646
Construction and land development real estate 88 54
Commercial, financial and agricultural 50 35 81
Consumer and other 4 2 8
-----------------------------
Total nonperforming loans 2,022 1,798 2,284
Total other real estate owned 1,512 2,691 3,009
-----------------------------
Total nonperforming assets $ 3,534 $ 4,489 $ 5,293
=============================
Ratios:
Total nonperforming loans to total loans 0.98% 0.94% 1.17%
=============================
Total nonperforming assets to total assets 0.95% 1.30% 1.70%
=============================
</TABLE>
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," on January 1, 1995. This standard requires that a
creditor measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, a creditor may measure impairment based on a
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a
creditor must measure impairment based on the fair value of the collateral
when the creditor determines that foreclosure is probable. In October
1994, SFAS No. 114 was amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures," which
allows creditors to use their existing methods for recognizing interest
income on impaired loans. Because the Company already recognized such
reductions of value on impaired loans through its provision for possible
loan losses, the adoption of SFAS No. 114, as amended by SFAS No. 118, did
not have a material impact on its financial condition or results of
operations. The balance of impaired loans was $805 thousand and $1.0
million, respectively, at December 31, 1996 and 1995. The Company has
identified a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the
loan agreements. The allowance for possible loan losses associated with
impaired loans allocated from and part of the general allowance for
possible loan losses, upon the adoption of SFAS No. 114, on January 1,
1995 was $864 thousand. During 1996 and 1995, provisions to the allowance
for impaired loans amounted to $377 thousand and $553 thousand,
respectively, and impaired loans charged off amounted to $578 thousand and
$1.1 million, respectively. The allowance for possible loan losses
associated with impaired loans at December 31, 1996 and 1995 was $166
thousand and $367 thousand, respectively. At December 31, 1996 and 1995,
there were no impaired loans which did not have an allowance for possible
loan losses determined in accordance with SFAS No. 114. The average
recorded investment in impaired loans was $634 thousand and $1.5 million,
respectively, in 1996 and 1995 and the income recognized on impaired loans
during 1996 and 1995 was $4 thousand and $19 thousand, respectively. Total
cash collected on impaired loans during 1996 and 1995 was $770 thousand
and $103 thousand, respectively, of which $766 thousand and $84 thousand,
respectively, was credited to the principal balance outstanding on such
loans. Interest which would have been accrued on impaired loans during
1996 and 1995, had they performed in accordance with the terms of their
contracts, was $61 thousand and $166 thousand, respectively. The Company's
policy for interest income recognition on impaired loans is to recognize
income on nonaccrual loans under the cash basis when the loans are both
current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Company; if these factors do not exist, the
Company does not recognize income.
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure.
Real estate acquired in settlement of loans are recorded at the lower of
the carrying value of the loan or the fair value of the property received
less an allowance for estimated costs to sell. Loan losses arising from
the acquisition of such properties are charged against the allowance for
possible loan losses. Provisions to reduce the carrying value to net
realizable value are charged to current period earnings as realized and
reflected as an additional valuation allowance. Operating expenses and
gains and losses upon disposition are reflected in earnings as realized.
Other real estate owned amounted to $1.5 million and $2.7 million at
December 31, 1996 and 1995, respectively. See note H of Notes to
Consolidated Financial Statements for further information on other real
estate owned.
The allowance for possible loan losses is a significant factor in
the Company's operating results and is established through charges against
income and is maintained at a level considered adequate to provide for
potential loan losses based on management's evaluation of known and
inherent risks in the loan portfolio. When a loan, or a portion of a loan,
is considered uncollectible it is charged against the allowance.
Recoveries of loans previously charged off are credited to the allowance
when received.
<PAGE> 11
Management's evaluation of the allowance is based on a continuing
review of the loan portfolio, which encompasses many factors, including
identification and review of individual problem situations that may affect
the borrower's ability to repay; review of overall portfolio quality
through an analysis of current charge off, delinquency, and nonperforming
loan data; review of regulatory authority examinations and evaluations of
loans; an assessment of current and expected economic conditions and
changes in the size and character of the loan portfolio.
At December 31, 1996, 1995 and 1994, the allowance for possible loan
losses was $3.7 million, $3.7 million and $4.2 million, respectively, and
the ratio of the allowance to total loans outstanding was 1.78%, 1.95% and
2.17%, respectively. At December 31, 1996, 1995 and 1994, the allowance
for possible loan losses represented 181.8%, 206.0% and 185.2%,
respectively, of nonperforming loans.
Management is continuing to carefully monitor the allowance for
possible loan losses in light of existing nonperforming loans, impaired
loans and the trend in the New England real estate market and local
economy. While management believes that the allowance for possible loan
losses at December 31, 1996 is adequate based on its current review and
estimate, further provisions to the allowance may be necessary if the
market in which the Company operates deteriorates. Additionally,
regulatory agencies review the Company's allowance for possible loan
losses as part of their examination process. Such agencies may require the
Company to recognize additions to the allowance based on judgments which
may be different from those of management.
Deposits increased $17.1 million or 5.93% to $304.2 million at
December 31, 1996 from $287.1 million at December 31, 1995. The increase
resulted primarily from the opening of a new branch office in downtown
Portsmouth, New Hampshire and the continued success of new deposit account
products introduced in 1995. Interest bearing deposits increased $17.2
million and noninterest bearing deposits decreased $118 thousand. Of the
$17.2 million increase in interest bearing deposits, NOW and Super NOW
accounts increased $18.3 million and time certificates increased $10.2
million, while savings accounts decreased $5.7 million and money market
deposit accounts decreased $5.6 million. Much of the decrease in savings
and money market deposit accounts related to transfers into a NOW account
product which the subsidiary bank introduced in 1995, or into our higher
yielding time certificates. Time certificates with minimum balances of
$100 thousand increased $291 thousand, from $12.0 million at December 31,
1995 to $12.3 million at December 31, 1996. The Company does not use
brokers to solicit deposits.
Securities sold under agreements to repurchase increased $5.3
million or 20.41% to $31.5 million at December 31, 1996 from $26.2 million
at December 31, 1995.
The increase in deposits and securities sold under agreements to
repurchase were used to fund loan growth and increases in securities
available for sale and held to maturity.
Stockholders' equity was $31.3 million at December 31, 1996, an
increase of $1.5 million from $29.8 million at December 31, 1995. Book
value per share was $15.81 at December 31, 1996, up $1.18 or 8.07% from
$14.63 at December 31, 1995. See "Capital Resources and Liquidity" for
further information on stockholders' equity.
Asset/Liability Management and
Interest Rate Sensitivity
The Company attempts to manage its liquidity, capital and interest
rate risk position so as to minimize its exposure to interest rate risk.
At December 31, 1996, the Company had interest rate sensitive assets which
repriced or matured within one year of $186.1 million and interest rate
sensitive liabilities which repriced or matured within one year of $274.5
million. At December 31, 1995, interest rate sensitive assets which
repriced or matured within one year were $235.3 million and interest rate
sensitive liabilities which repriced or matured within one year were
$260.2 million.
The Company actively manages its interest rate sensitivity position.
The objectives of interest rate risk management are to control the
exposure of net interest income to risks associated with interest rate
movements and to achieve a stable and rising flow of net interest income.
The Asset/Liability Management Committee, using policies approved by the
Board of Directors, is responsible for managing the Company's rate
sensitivity position. GAP measurement attempts to analyze any mismatches
in the timing of interest rate repricing between assets and liabilities.
It identifies those balance sheet sensitivity areas which are vulnerable
to unfavorable interest rate movements. As a tool of asset/liability
management, the GAP position is compared with potential changes in
interest rate levels in an attempt to measure the favorable and
unfavorable effect such changes would have on net interest income. For
example, when the GAP is positive, (i.e., assets reprice faster than
liabilities) a rise in interest rates will increase net interest income,
and conversely, if the GAP is negative, a rise in rates will decrease net
interest income. The accuracy of this measure is limited by unpredictable
loan prepayments, lags in the interest rate indices used for repricing
variable rate loans and lags in the interest rate changes made by the
subsidiary bank on its deposit products.
The Company's principal measure of interest rate risk is GAP
analysis. The Company's requirements for an acceptable GAP in its
asset/liability management policy are within a range of positive 10% to
negative 25% at a one year interval. As shown in the following table, the
Company's
<PAGE> 12
one year cumulative GAP was negative 23.85% of total assets at December 31,
1996, which is within the requirements of the asset/liability management
policy. The Company's one year cumulative GAP at December 31, 1995 was
negative 7.18% of total assets. The change is primarily due to increases in
securities and loans that reprice after one year of $71.6 million, partially
offset by an increase in interest bearing liabilities that reprice after one
year of $8.2 million. Assets and liabilities shown in the table are
considered to reprice at the earlier of maturity or the next contractual
repricing date. Nonperforming loans totaling $2.0 million have been excluded
from this analysis. Regular savings, NOW and Super NOW and money market
deposit accounts, totaling $156.8 million, are subject to immediate
withdrawal and repricing, and are therefore included in the 0--6 month time
period; however, this withdrawal and repricing assumption is not likely to
occur.
INTEREST RATE SENSITIVITY GAP ANALYSIS
at December 31, 1996
<TABLE>
<CAPTION>
Sensitivity Period
--------------------------------------------------------------------------
0--6 6 Months-- 1--3 3--5 Over
Months 1 Year Years Years 5 Years Total
------------ ---------- ---------- --------- --------- ---------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans and loans held for sale $ 38,273 $ 113,845 $ 40,998 $ 4,444 $ 7,782 $ 205,342
Interest bearing deposits in FHLBB 17,993 17,993
Securities, including stock in FHLBB 16,036 58,944 18,379 18,779 112,138
-------------------------------------------------------------------------
Total $ 72,302 $ 113,845 $ 99,942 $ 22,823 $ 26,561 $ 335,473
=========================================================================
Interest Bearing Liabilities:
Deposits $ 221,415 $ 21,496 $ 26,996 $ 2,434 $ 9 $ 272,350
Securities sold under agreements to
repurchase and other borrowings 31,555 20 88 99 464 32,226
-------------------------------------------------------------------------
Total $ 252,970 $ 21,516 $ 27,084 $ 2,533 $ 473 $ 304,576
=========================================================================
Period Sensitivity Gap $ (180,668) $ 92,329 $ 72,858 $ 20,290 $ 26,088 $ 30,897
Cumulative Sensitivity Gap $ (180,668) $ (88,339) $ (15,481) $ 4,809 $ 30,897 $ 30,897
Cumulative Sensitivity Gap as a
Percent of Total Assets (48.77)% (23.85)% (4.18)% 1.30% 8.34% 8.34%
</TABLE>
RESULTS OF OPERATIONS
General
The operating results of the Company depend primarily on the net
interest and dividend income of its subsidiary bank, which is the
difference between interest and dividend income on interest earning
assets, primarily loans and securities, and interest expense on interest
bearing liabilities, primarily deposits and securities sold under
agreements to repurchase and other borrowings. The Company's operating
results are also affected by the level of its provision for possible loan
losses, noninterest income, including net gains on sales of securities
available for sale and loans, fee and service charge income, and its
noninterest expenses.
Comparison of Operating Results for the Years
Ended December 31, 1996 and 1995
Net Earnings
Operations in 1996 resulted in net earnings of $3.8 million, an
increase of $345 thousand or 10.04% over net earnings of $3.4 million for
1995. Earnings per common share were $1.79 in 1996 ($1.78 fully diluted),
an increase of 13.29% over $1.58 in 1995 ($1.57 fully diluted).
Earnings before income taxes were $5.7 million in 1996, an increase
of $417 thousand or 7.86% over earnings before income taxes of $5.3
million in 1995. Earnings increases in 1996 compared to 1995, related
primarily to increases in net interest and dividend income, net gains on
sales of securities available for sale and loans and a decrease
<PAGE> 13
in the provision for possible loan losses, partially offset by an increase in
noninterest expense.
Net Interest and Dividend Income
Net interest and dividend income was $13.7 million and $13.6 million
in 1996 and 1995, respectively. The increase of $99 thousand in 1996
compared to 1995 relates to an increase of $19.6 million or 6.57% in
average interest earning assets to $317.9 million in 1996 from $298.3
million in 1995, offset by a decrease in the interest rate spread from
4.16 % in 1995 to 3.95% in 1996.
Interest income on loans decreased $254 thousand from $18.3 million
in 1995 to $18.0 million in 1996. The decrease in 1996 was primarily the
result of a decrease in the average yield earned from 9.56% in 1995 to
9.37% in 1996, partially offset by an increase in average balances of $1.2
million to $192.9 million in 1996 from $191.7 million in 1995. The
decrease in yields in 1996 compared to 1995 reflects the lower interest
rate environment for loans during 1996 compared to 1995. Relatively stable
interest rates and competition for loans among financial institutions in
the Company's market areas contributed to the lower interest rate
environment during 1996. Management expects that the competition for loans
will continue, which could reduce average yields realized on loans,
thereby reducing the interest rate spread in future periods. The increase
in average balances in the loan portfolio in 1996 compared to 1995,
although relatively insignificant at less than 1% for the year, reflects
relatively weak loan demand in the first half of the year, where average
balances in fact decreased, and stronger loan demand in the last half of
the year. Residential real estate loan demand was strong throughout most
of 1996; however, commercial real estate loan demand was strong only
during the latter part of the year. Additionally, beginning in July of
1996 the Company began retaining for its portfolio, fifteen year fixed
rate residential real estate loans which prior to that time were being
sold in the secondary mortgage market.
Interest and dividend income on securities, including stock in FHLBB
increased $1.3 million or 23.32% to $6.7 million in 1996 from $5.4 million
in 1995. The increase in 1996 compared to 1995, was primarily the result
of an increase in the average yield earned to 6.11% in 1996 from 5.90% in
1995, coupled with an increase in average balances of $17.6 million or
19.12% to $109.8 million in 1996 from $92.2 million in 1995. The increase
in yield relates primarily to the reinvestment of amounts from maturing 2
to 3 year U.S. Treasury obligations as well as the investment of new funds
into higher yielding 3 to 5 year U.S. government agency obligations. This
had the impact of changing the mix of the Company's investment in debt
securities from approximately 69% in U.S. Treasury obligations at December
31, 1995 to approximately 66% in U.S. government agency obligations at
December 31, 1996. Additionally, the weighted average life of the
Company's debt securities portfolio, although remaining relatively short
at 27 months at December 31, 1996, was longer than the weighted average
life of 17 months at December 31, 1995.
Interest income on interest bearing deposits with the FHLBB,
decreased $47 thousand or 5.77% from $814 thousand in 1995 to $767
thousand in 1996. The decrease in 1996 compared to 1995, is primarily
related to a decrease in average yield earned from 5.64% in 1995 to 5.05%
in 1996, partially offset by a slight increase in average balances of $775
thousand or 5.37% to $15.2 million in 1996 from $14.4 million in 1995. The
lower yield in 1996 compared to 1995, reflects the generally lower
interest rate environment for short term overnight investments in 1996
compared to 1995.
Interest expense on deposits increased $1.1 million or 12.22% to
$10.6 million in 1996 from $9.5 million in 1995. The increase in 1996
compared to 1995, is the result of an increase of $22.4 million or 9.24%
in the average balances of interest bearing deposits to $264.3 million in
1996 from $241.9 million in 1995, coupled with an increase in the cost of
those deposits to 4.02% in 1996 from 3.92% in 1995. The opening of a new
branch office in April 1996, the continued success of new deposit account
products introduced in 1995 and the continuation of higher rates of
interest offered on certain deposit products in 1996 resulted in the
higher average balances in deposits and the higher cost of those deposits
in 1996 compared to 1995.
Interest expense on securities sold under agreements to repurchase
and other borrowings decreased $289 thousand or 19.33% from $1.5 million
in 1995 to $1.2 million in 1996. The decrease in 1996 compared to 1995,
was primarily the result of a decrease in average balances of $1.8 million
or 6.40% to $25.5 million in 1996 from $27.3 in 1995, coupled with a
decrease in the cost of those borrowings to 4.73% in 1996 from 5.48% in
1995. The lower cost of borrowings related primarily to the lower interest
rate environment for short term securities sold under agreements to
repurchase that was prevalent during 1996, as well as the repayment of all
short-term borrowings with the FHLBB in 1995, which were at a higher rate
of interest than securities sold under agreements to repurchase. The
decrease in the average balances related primarily to repayments of short-
term borrowings with the FHLBB in 1995 which were not outstanding in 1996,
partially offset by an increase in the average balances of securities sold
under agreements to repurchase of $3.6 million to $24.7 million in 1996
from $21.1 million in 1995. This increase was the result of local
municipalities making greater use of these products when investing their
excess funds.
<PAGE> 14
Average Balance Sheets and Net Interest
and Dividend Income
The following table presents, for the periods indicated, average
balances, the total dollar amount of interest and dividend income from
interest earning assets and their resultant yields, as well as the
interest expense on interest bearing liabilities, and their resultant
costs:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ------ -------- -------- ------ -------- -------- ------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans and loans held for sale <F1> $192,898 $18,073 9.37% $191,696 $18,327 9.56% $189,034 $15,587 8.25%
Interest bearing deposits
in FHLBB 15,201 767 5.05 14,426 814 5.64 4,793 149 3.11
Securities, including stock
in FHLBB <F2> 109,797 6,710 6.11 92,171 5,441 5.90 89,729 4,608 5.14
-------- ------- -------- ------- -------- -------
Total interest earning assets 317,896 25,550 8.04 298,293 24,582 8.24 283,556 20,344 7.17
------- ------- -------
Non-interest earning assets 37,954 32,646 30,164
Allowance for possible loan
losses (3,751) (3,830) (3,702)
-------- -------- --------
Total assets $352,099 $327,109 $310,018
======== ======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities
Savings deposits $156,621 4,690 2.99 $142,695 4,139 2.90 $149,333 3,412 2.28
Time deposits 107,689 5,946 5.52 99,248 5,339 5.38 76,967 2,935 3.81
-------- ------- -------- -------- -------- -------
Total interest bearing deposits 264,310 10,636 4.02 241,943 9,478 3.92 226,300 6,347 2.80
Securities sold under agreements
to repurchase and other
borrowings 25,523 1,206 4.73 27,269 1,495 5.48 29,086 1,357 4.67
-------- ------- -------- -------- -------- -------
Total interest bearing
liabilities 289,833 11,842 4.09 269,212 10,973 4.08 255,386 7,704 3.02
------- ------- -------
Non-interest bearing liabilities
Demand deposits 29,766 27,685 27,027
Other liabilities 2,164 2,118 1,302
-------- -------- --------
Total non-interest bearing
liabilities 31,930 29,803 28,329
Stockholders' equity 30,336 28,094 26,303
-------- -------- --------
Total liabilities and
stockholders' equity $352,099 $327,109 $310,018
======== ======== ========
Net interest and dividend income/
interest rate spread $13,708 3.95% $13,609 4.16% $12,640 4.15%
======= ===== ======= ===== ======= =====
Net earning balance/net yield on
interest earning assets $ 28,063 4.31% $ 29,081 4.56% $ 28,170 4.46%
======== ===== ======== ===== ======== =====
- --------------------
<FN>
<F1> Loans on nonaccrual status are included in the average balances for
all periods presented.
<F2> The yield on securities, including stock in FHLBB is calculated using
interest income divided by the average balance of the amortized
historical cost.
</FN>
</TABLE>
<PAGE> 15
Rate Volume Analysis
The following table presents the dollar amount of changes in
interest and dividend income and interest expense for each major component
of interest earning assets and interest bearing liabilities, and the
amount of change attributable to changes in average balances (volume),
average rates, and average balances and rates for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 vs. 1995
Increase (Decrease) Due To
---------------------------------------------
Volume Rate Rate/Volume Total
------- --------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income on loans $ 115 $ (364) $ (5) $ (254)
Interest income on interest bearing deposits in FHLBB 44 (85) (6) (47)
Interest and dividend income on securities and stock
in FHLBB 1,040 194 35 1,269
--------------------------------------------
Total interest and dividend income 1,199 (255) 24 968
--------------------------------------------
Interest expense on deposits 877 242 39 1,158
Interest expense on securities sold under agreements
to repurchase and other borrowings (96) (205) 12 (289)
--------------------------------------------
Total interest expense 781 37 51 869
--------------------------------------------
Net interest and dividend income $ 418 $ (292) $ (27) $ 99
============================================
<CAPTION>
Year Ended December 31, 1995 vs. 1994
Increase (Decrease) Due To
---------------------------------------------
Volume Rate Rate/Volume Total
------- --------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income on loans $ 220 $ 2,476 $ 44 $ 2,740
Interest income on interest bearing deposits in FHLBB 300 121 244 665
Interest and dividend income on securities and stock
in FHLBB 126 682 25 833
--------------------------------------------
Total interest and dividend income 646 3,279 313 4,238
--------------------------------------------
Interest expense on deposits 438 2,535 158 3,131
Interest expense on securities sold under agreements
to repurchase and other borrowings (85) 236 (13) 138
--------------------------------------------
Total interest expense 353 2,771 145 3,269
--------------------------------------------
Net interest and dividend income $ 293 $ 508 $ 168 $ 969
============================================
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses was $650 thousand in 1996,
representing an $85 thousand or 11.56% decrease from the provision of $735
thousand in 1995. The decrease in the provision resulted primarily from
the decrease in net loans charged off in 1996 compared to 1995, as well as
management's overall evaluation of the loan portfolio and the adequacy of
the level of the allowance for possible loan losses in relation to total
loans and nonperforming loans. Loans charged off in 1996 were $1.2 million
compared to $1.4 million in 1995. Recoveries of loans previously charged
off were $515 thousand in 1996 compared to $144 thousand in 1995. Net
loans charged off were $678 thousand in 1996 compared to $1.3 million in
1995.
Noninterest Income
Noninterest income was $3.2 million in 1996, an increase of $666
thousand or 26.48% from $2.5 million in 1995.
The increase in 1996 over 1995, was primarily attributable to an
increase in net gains on sales of securities available for sale of $361
thousand and an increase in net gains on sales of loans of $238 thousand.
Net gains on sales of loans increased primarily as a result of the
Company's adoption of SFAS No. 122, Accounting for Mortgage Servicing
Rights, which increased net gains on sales of loans by $257 thousand.
<PAGE> 16
Noninterest Expense
Noninterest expense was $10.5 million in 1996, an increase of $433
thousand or 4.30% over $10.1 million in 1995.
Salaries and benefits expense increased $398 thousand or 7.89% to
$5.4 million in 1996 from $5.0 million in 1995. The increase in 1996 was
attributable to increases in salary and compensation expense of $495
thousand and decreases in benefit expenses of $97 thousand. The increase
in salary and compensation expense was the result of normal salary
increases of approximately 4.43%, or $180 thousand, $220 thousand in
compensation for the reimbursement of personal income taxes to certain
officers upon their exercise of non-statutory stock options during 1996
and other salary increases of $95 thousand relating primarily to higher
salaries associated with loan origination and one additional full time
equivalent employee during the year. The after tax impact of the expense
associated with the reimbursement of taxes upon the exercise by certain
officers of non-statutory stock options was offset by an income tax
benefit to the Company upon the exercise of these options, which benefit
was credited to additional paid-in capital and which is reflected in the
Consolidated Statement of Stockholders' Equity. The decrease in benefits
expense of $97 thousand relates to a decrease in health insurance costs of
$228 thousand because of better health experience of employees within the
Company's self insured health insurance plan, partially offset by
increases in payroll taxes, retirement and other benefits.
Occupancy and equipment expense increased $259 thousand or 14.99% to
$2.0 million in 1996 from $1.7 million in 1995. The increase was primarily
attributable to increases in depreciation expense of $96 thousand,
maintenance contracts of $76 thousand and software development expenses of
$30 thousand. These increases were the result of new equipment associated
with the Company upgrading its data processing systems during the third
quarter of 1995 and making further enhancements to those systems during
1996.
Expenses associated with other real estate owned decreased $161
thousand or 41.49% to $227 thousand in 1996 from $388 thousand in 1995.
The decrease was primarily the result of a decrease in net foreclosure and
holding costs of $72 thousand, to $275 thousand in 1996 compared to $347
thousand in 1995, as a result of lower levels of other real estate owned
in the Company's portfolio in 1996 compared to 1995 and a decrease in
provisions for loss subsequent to foreclosure of $102 thousand, to $101
thousand in 1996 from $203 thousand in 1995.
Other noninterest expense decreased $63 thousand in 1996 compared to
1995, staying constant at $2.9 million each year. Components with
significant changes in other noninterest expense were advertising, FDIC
deposit insurance premiums and a special assessment by the FDIC to
recapitalize the SAIF on the Company's SAIF-assessable OAKAR deposits.
Advertising expense decreased $112 thousand to $220 thousand in 1996 from
$332 thousand in 1995, as the amount expended to advertise new deposit
products in 1995 was reduced in 1996. FDIC deposit insurance premiums
decreased $210 thousand to $73 thousand in 1996 from $283 thousand in
1995. The decrease is the result of the FDIC further decreasing BIF
deposit insurance premiums in 1996 compared to 1995 as a result of the BIF
being fully recapitalized in 1995. Further significant decreases in FDIC
deposit insurance premiums are not expected. The special SAIF assessment
on the Company's SAIF-assessable OAKAR deposits was $187 thousand in 1996
compared to $0 in 1995, as a result of the FDIC making this special
assessment for the purpose of recapitalizing the SAIF as a result of
legislation signed by the President on September 30, 1996. Such an
assessment is not expected in 1997.
Income Taxes
Income tax expense increased $72 thousand or 3.84%, but remained
relatively constant at $1.9 million in 1996 and 1995 and represented
effective tax rates of 34.0% and 35.3%, respectively, of pretax income.
Comparison of Operating Results for the Years
Ended December 31, 1995 and 1994
Net Earnings
Operations in 1995 resulted in net earnings of $3.4 million, an
increase of $612 thousand or 21.68% over net earnings of $2.8 million for
1994. Net earnings per common share were $1.58 ($1.57 fully diluted) in
1995, an increase of 24.41% over $1.27 ($1.26 fully diluted) in 1994.
Earnings before income taxes were $5.3 million in 1995, an increase
of $1.2 million or 30.26% over $4.1 million in 1994. Earnings increases in
1995 compared to 1994 related primarily to an increase in net interest and
dividend income, increases in net gains on securities transactions and
sales of loans and a slight decrease in noninterest expense, partially
offset by an increase in the provision for possible loan losses.
<PAGE> 17
Net Interest and Dividend Income
Net interest and dividend income was $13.6 million and $12.6 million
in 1995 and 1994, respectively. The increase in 1995 of $969 thousand or
7.67% over 1994, relates primarily to an increase in the net yield on
interest earning assets to 4.56 % in 1995 from 4.46% in 1994, coupled with
an increase in average interest earning assets to $298.3 million in 1995
from $283.6 million in 1994.
The interest rate spread for the years ended December 31, 1995 and
1994, was 4.16% and 4.15%, respectively.
Interest income on loans increased $2.7 million or 17.58% from $15.6
million in 1994 to $18.3 million in 1995. The increase in 1995 was
primarily the result of an increase in the average yield earned to 9.56%
in 1995 from 8.25% in 1994 and a slight increase in average balances to
$191.7 million in 1995 from $189.0 million in 1994. The increase in yield
reflects the upward trend in interest rates during the last three quarters
of 1994 and through the first quarter of 1995 with interest rates
stabilizing throughout most of the remainder of 1995 and trending downward
slightly during the latter part of 1995. Therefore, adjustable rate loans,
which comprise a majority of the Company's loan portfolio adjusted for the
most part to higher rates in 1995. The slight increase in average balances
in the loan portfolio in 1995 compared to 1994 reflects weak loan demand
in the commercial and commercial real estate sectors of the market.
Additionally, as interest rates trended lower in the latter part of 1995,
many residential borrowers with adjustable rate loans refinanced into
fixed rate loans which the Company sold into the secondary mortgage
market, thereby reducing the Company's portfolio of residential real
estate loans.
Interest and dividend income on securities, including stock in FHLBB
increased $833 thousand or 18.08% to $5.4 million in 1995 from $4.6
million in 1994. The increase in 1995 compared to 1994, was primarily the
result of an increase in the average yield earned to 5.90% in 1995 from
5.14% in 1994 coupled with a slight increase in average balances to $92.2
million in 1995 from $89.7 million in 1994. The increase in yield reflects
the upward trend in interest rates during the last three quarters of 1994
and the first quarter of 1995 with maturing securities reinvested and new
investments in securities invested at higher interest rates during 1995
than during 1994.
Interest income on interest bearing deposits with the FHLBB,
increased $665 thousand to $814 thousand in 1995 from $149 thousand in
1994. The increase in 1995 compared to 1994, is primarily related to an
increase in average balances to $14.4 million in 1995 compared to $4.8
million in 1994, coupled with an increase in average yield earned to 5.64%
in 1995 from 3.11% in 1994. The increase in average balances was primarily
attributable to the flattening and inversion of the interest rate yield
curve during the latter part of 1995, making these investments more
attractive than investments in 2 to 3 year fixed income securities from a
yield standpoint. The increase in yields relates to the higher yields
realized on these investments in 1995 as compared to lower rates in early
1994, which is when the Company was invested in these investments in 1994.
During the latter part of 1994, as rates increased, these investments were
transferred into investments in 2 to 3 year fixed income securities.
Interest expense on deposits increased $3.2 million or 49.33% to
$9.5 million in 1995 from $6.3 million in 1994. The increase in 1995
compared to 1994, is the result of an increase of $15.6 million in the
average balances of interest bearing deposits to $241.9 million in 1995
from $226.3 million in 1994, coupled with an increase in the cost of
those deposits to 3.92% in 1995 from 2.80% in 1994. New deposit account
products, coupled with higher market rates of interest offered by the
subsidiary bank in 1995, resulted in the higher average balances in
deposits and the higher cost of deposits.
Interest expense on securities sold under agreements to repurchase
and other borrowings increased $138 thousand or 10.17% to $1.5 million in
1995 from $1.4 million in 1994. The increase in 1995 compared to 1994, was
primarily the result of an increase in the cost of borrowings to 5.48% in
1995 from 4.67% in 1994, partially offset by a decrease in the average
balances of borrowings to $27.3 million in 1995 from $29.1 million in
1994.
Provision for Possible Loan Losses
The provision for possible loan losses was $735 thousand and $600
thousand, respectively, in 1995 and 1994. Total loans charged against the
allowance were $1.4 million and $421 thousand, respectively, in 1995 and
1994. Recoveries of loans previously charged off were $144 thousand and
$47 thousand, respectively, in 1995 and 1994. The increase in the
provision of $135 thousand or 22.50% in 1995 compared to 1994, was
primarily the result of the increased level of loan charge offs in 1995.
The increase in charge offs in 1995 compared to 1994, was primarily the
result of an increase in commercial, financial and agricultural loan
charge offs of $757 thousand, an increase in residential real estate loan
charge offs of $129 thousand and an increase in commercial real estate
loan charge offs of $101 thousand.
<PAGE> 18
Noninterest Income
Noninterest income was $2.5 million and $2.2 million, respectively,
in 1995 and 1994.
The increase in 1995 of $318 thousand or 14.47% over 1994, was
primarily attributable to an increase in net gains on sales of securities
available for sale of $131 thousand and a decrease in net losses on
trading securities of $141 thousand.
Noninterest Expense
Noninterest expense was $10.1 million and $10.2 million in 1995 and
1994, respectively. The Company has closely monitored and continues its
efforts to reduce noninterest expense.
Salaries and benefits expense increased $329 thousand to $5.0
million in 1995 from $4.7 million in 1994. The increase in 1995 over 1994,
was primarily attributable to salary increases of $130 thousand, as a
result of average salary increases of 4.3% and an increase in health
insurance costs of $180 thousand, associated with the Company's self
insured health insurance plan.
Occupancy and equipment expense decreased $104 thousand or 5.68% to
$1.7 million in 1995 from $1.8 million in 1994. The decrease is primarily
attributable to a decrease in depreciation expense of $34 thousand and
decreases in costs associated with maintenance contracts of $29 thousand
and insurance expense of $18 thousand as a result of reviewing and
renegotiating certain of these contracts.
Expenses associated with other real estate owned decreased $101
thousand or 20.65% to $388 thousand in 1995 from $489 thousand in 1994.
The decrease was primarily attributable to a reduction in net foreclosure
and holding costs of $36 thousand, from $383 thousand in 1994 to $347
thousand in 1995, as a result of lower levels of other real estate owned
in the Company's portfolio in 1995 compared to 1994 and an increase in
gains on sales of other real estate owned of $95 thousand, to $162
thousand in 1995 from $67 thousand in 1994, partially offset by an
increase in the provision for loss subsequent to foreclosure of $30
thousand, from $173 thousand in 1994 to $203 thousand in 1995.
Other noninterest expenses decreased $205 thousand or 6.56% to $2.9
million in 1995 from $3.1 million in 1994. The decrease was primarily
attributable to a reduction in FDIC deposit insurance premiums of $298
thousand to $283 thousand in 1995 from $581 thousand in 1994, partially
offset by an increase in advertising costs of $97 thousand to $332
thousand in 1995 from $235 thousand in 1994, associated with advertising
new deposit account products and higher market rates of interest offered
by the subsidiary bank in 1995. The decrease in FDIC deposit insurance
premiums resulted primarily from the reduction of BIF deposit insurance
premiums in August of 1995, effective as of June 1, 1995. The majority of
the Company's deposits are insured by the BIF. A portion of the Company's
deposits are OAKAR deposits (approximately $42.4 million at December 31,
1995), which are deposits purchased from institutions previously insured
by the SAIF. Such deposits continue to be insured by the SAIF.
Income Taxes
Income tax expense in 1995 and 1994 was $1.9 million and $1.3
million, respectively. The increase in 1995 of $621 thousand compared to
1994, relates primarily to the increase in pretax income.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
The Company's capital base totaled $31.3 million or 8.45% of total
assets at December 31, 1996 compared to $29.8 million, or 8.60% of total
assets at December 31,1995. Stockholders' equity increased $1.5 million,
as a result of earnings of $3.8 million, $376 thousand in unrealized gains
on securities available for sale net of related income taxes, $217
thousand from the issuance of common stock upon the exercise of stock
options and $126 thousand of tax benefits associated with the exercise of
non-statutory stock options, partially offset by cash dividends declared
on common stock of $1.1 million and the purchase of common stock for
treasury in the amount of $1.9 million.
On June 14, 1994, the Company announced a Stock Repurchase Plan
("Plan"), whereby the Company's Board of Directors authorized the
repurchase of up to 9% of its outstanding common shares from time to time.
Shares repurchased under the Plan may be held in treasury, retired or used
for general corporate purposes. As of August 13, 1996, the Company
completed the repurchase of its stock under the Plan.
On August 13, 1996, the Company announced another Stock Repurchase
Program ("Program"), whereby the Company's Board of Directors authorized
the repurchase of up to 10% of its outstanding common shares from time to
time. Shares repurchased under the program may be held in treasury,
retired or used for general corporate purposes. As of December 31, 1996,
the Company has repurchased 34,989 shares under the Program, representing
1.77% of common shares outstanding at August 13, 1996.
<PAGE> 19
The Company and subsidiary bank are subject to various regulatory
capital requirements administered by federal banking agencies. Failure to
meet minimum requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and subsidiary bank must meet
specific capital guidelines that involve quantitative measures of their
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsidiary bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1996, that the Company
and subsidiary bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Company's wholly-owned subsidiary bank as "well-
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as well-capitalized, the subsidiary bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the table. There have been no conditions or events since that
notification that management believes would cause a change in the
subsidiary bank's categorization.
The Company's and the subsidiary bank's actual capital amounts and
ratios as of December 31, 1996 and 1995 are presented in the following
table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $29,791 14.23% $16,748 >=8.00% N/A
Subsidiary Bank $29,128 14.14% $16,485 >=8.00% $20,607 >=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $27,161 13.14% $ 8,269 >=4.00% N/A
Subsidiary Bank $26,501 13.03% $ 8,138 >=4.00% $12,206 >= 6.00%
Tier I Capital (to Average Assets):
Consolidated $27,161 7.50% $14,494 >=4.00% N/A
Subsidiary Bank $26,501 7.32% $14,485 >=4.00% $18,106 >= 5.00%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated $27,992 15.85% $14,132 >=8.00% N/A
Subsidiary Bank $26,572 15.06% $14,114 >=8.00% $17,642 >=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $25,739 14.76% $ 6,976 >=4.00% N/A
Subsidiary Bank $24,320 13.96% $ 6,967 >=4.00% $10,450 >= 6.00%
Tier I Capital (to Average Assets):
Consolidated $25,739 7.47% $13,788 >=4.00% N/A
Subsidiary Bank $24,320 7.08% $13,750 >=4.00% $17,187 >= 5.00%
</TABLE>
<PAGE> 20
Liquidity
The principal source of funds for the payment of dividends and
expenses by the Company, is dividends paid to it by the subsidiary bank.
Bank regulatory authorities generally restrict the amounts available for
payment of dividends by the subsidiary bank to the Company if the effect
thereof would cause the capital of the subsidiary bank to be reduced below
applicable capital requirements. These restrictions indirectly affect the
Company's ability to pay dividends. Dividends paid to the Company by the
subsidiary bank in 1996, 1995 and 1994 were $2.0 million, $2.0 million and
$1.9 million, respectively. The primary source of liquidity in the Company
is its interest bearing deposit with its subsidiary bank of $719 thousand
at December 31, 1996. Management believes that these funds are adequate to
provide for the Company's needs.
The subsidiary bank monitors its level of short-term assets and
liabilities, maintaining an appropriate balance between liquidity, risk
and return. The major sources of liquidity are securities available for
sale, maturities of securities held to maturity, interest bearing deposits
in FHLBB and amortization, prepayments and maturities of outstanding
loans.
The Company's and subsidiary bank's liquidity, represented by cash
and due from banks, is a product of its operating activities, investing
activities and financing activities. These activities are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Cash and due from banks at beginning of year $ 17,771 $ 9,255 $ 9,593
Operating activities:
Net earnings 3,780 3,435 2,823
Adjustments to reconcile net earnings to net
cash provided by operating activities 788 354 25,939
------------------------------
Net cash provided by operating activities 4,568 3,789 28,762
Net cash used in investing activities (23,801) (24,398) (35,466)
Net cash provided by financing activities 19,591 29,125 6,366
------------------------------
Cash and due from banks at end of year $ 18,129 $ 17,771 $ 9,255
==============================
</TABLE>
Cash provided by operating activities in 1996 and 1995 related
primarily to net earnings. Cash provided by operating activities in 1994
was primarily attributable to net earnings and a decrease in trading
securities.
The Company's and subsidiary bank's primary investing activities are
loans, securities and interest bearing deposits with the FHLBB. Net
lending activities used $18.1 million in cash in 1996, provided $1.2
million in cash in 1995 and used $10.5 million in cash in 1994. Cash used
in lending activities in 1996 reflects the strong loan demand throughout
the year for residential real estate loans and for the latter part of the
year for commercial real estate loans. The cash used to fund this loan
demand came from increases in deposits and securities sold under
agreements to repurchase. Cash provided in lending activities in 1995
reflects the weak loan demand for 1995, whereas the use of cash in
lending activities in 1994 reflects relatively strong loan demand in that
year. During 1996, purchases of securities available for sale and held to
maturity exceeded proceeds from sales of securities available for sale,
maturities of securities available for sale and held to maturity and a
decrease in interest bearing deposits in the FHLBB by $6.3 million. The
cash used for these net purchases came primarily from increases in
deposits and securities sold under agreements to repurchase. During 1995,
purchases of securities available for sale and increases in interest
bearing deposits in the FHLBB exceeded proceeds from sales of securities
available for sale and maturities of securities available for sale and
held to maturity by $26.7 million. The cash used for these net purchases
came primarily from increases in deposits. During 1994, purchases of
securities held to maturity, securities available for sale and stock in
the FHLBB, exceeded proceeds from sales of securities available for sale,
maturities of securities available for sale and held to maturity and
decreases in interest bearing deposits in the FHLBB by $26.8 million. The
funds used for these net purchases came primarily from operating
activities.
Cash was provided by financing activities in 1996, 1995 and 1994.
The Company's and subsidiary bank's primary financing activities are
deposits, securities sold under agreements to repurchase and other
borrowings. Total deposits increased by $17.0 million and $47.1 million in
1996 and 1995, respectively, and decreased by $21.3 million in 1994. The
increase in 1996 related primarily to the opening
<PAGE> 21
of a new branch office in downtown Portsmouth, New Hampshire, the continued
success of new deposit account products introduced in 1995 and the
continuation of higher rates of interest offered on certain deposit products.
The funds provided by this increase were utilized to fund loan demand and
purchase securities available for sale and held to maturity. The increase in
1995 related to the introduction of new deposit account products, coupled
with higher market rates of interest offered by the subsidiary bank. The funds
provided by this increase were utilized to purchase securities and
interest bearing deposits in the FHLBB, as well as to pay off all short-
term borrowings with the FHLBB. The decreases in deposits in 1994 related
to the low interest rate environment, which continued to encourage
depositors to seek other financial instruments outside of traditional
banking products with higher yields. Short-term borrowings in the form of
securities sold under agreements to repurchase increased $5.3 million,
$4.2 million and $8.2 million, respectively, in 1996, 1995 and 1994. The
funds provided by the increase in 1996 were utilized to fund loan demand
and purchase securities available for sale and held to maturity.The
increase in 1995 contributed to an increase in cash on hand and due from
banks, while the increase in 1994 was used to fund deposit outflows. In
1994, the subsidiary bank borrowed $21.2 million from the FHLBB, $20.9
million of which was short-term overnight advances. During 1995, these
short-term overnight borrowings were paid off with funds provided by
deposit increases. In 1994, these borrowings were used to fund deposit
outflows.
Liquidity management is both a daily and long-term function of
management. Excess liquidity is generally invested in short-term
investments such as interest bearing deposits in the FHLBB and 2 to 5 year
fixed income US Treasury and US Government agency securities and, to a
lesser extent, corporate securities. If the subsidiary bank requires funds
beyond its ability to generate them internally, borrowing arrangements
with the FHLBB can provide additional funds. At December 31, 1996, the
subsidiary bank had $691 thousand of outstanding borrowings with the
FHLBB, with an additional borrowing capacity of approximately $154.4
million. The outstanding FHLBB borrowings were used to fund affordable
housing projects in the subsidiary bank's market area.
The Company anticipates that the subsidiary bank will have
sufficient funds available to meet its current loan commitments. At
December 31, 1996, the subsidiary bank had outstanding loan commitments of
$22.8 million. For additional information as to loan commitments, see note
L of Notes to Consolidated Financial Statements. Time deposits which are
scheduled to mature in one year or less at December 31, 1996, totalled
$86.2 million. Management believes that a significant portion of such
deposits will remain with the subsidiary bank.
For a discussion of the limitations that federal law places on
extensions of credit from banks to their parent holding company, see note
Q of Notes to Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated
financial data herein have been presented in accordance with generally
accepted accounting principles which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time
due to inflation. Inflation can affect the Company in a number of ways,
including increased operating costs and interest rate volatility. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance
than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices
of goods and services. Management attempts to minimize the effects of
inflation by maintaining an approximate match between interest rate
sensitive assets and interest rate sensitive liabilities and, where
practical, by adjusting service fees to reflect changing costs.
LEGAL PROCEEDINGS
The Company is a defendant in ordinary and routine pending legal
actions incident to its business, none of which is believed by management
to be material to the financial condition of the Company.
RECENT ACCOUNTING DEVELOPMENTS
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of. In March 1995, the FASB issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 is
effective for years beginning after December 15, 1995 and establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This statement requires that long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company's adoption of SFAS No. 121 on Janu-
<PAGE> 22
ary 1, 1996 had no significant effect on its consolidated financial statements.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB
issued SFAS No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No.
122"). The Statement, which was prospectively adopted by the Company on
January 1, 1996, requires the Company to recognize as separate assets
rights to service mortgage loans for others, however those servicing
rights are acquired. When the Company acquires mortgage servicing rights
either through the purchase or origination of mortgage loans (originated
mortgage loan servicing rights) and sells those loans with servicing
rights retained, it allocates the total cost of the mortgage loans to the
mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values. As a result of adoption, the
Company recorded additional gains on sales of mortgage loans of
approximately $257 thousand and amortization expense on originated
mortgage servicing rights of $35 thousand for the year ended December 31,
1996. The after tax impact of these items increased net earnings by $136
thousand or $.06 per share.
Purchased and originated loan servicing rights are amortized on a
basis which results in approximately level rates of return in proportion
to, and over the period of, estimated net servicing income.
On a quarterly basis, the Company assesses the carrying values of
originated and purchased mortgage servicing rights for impairment based on
the fair value of such rights. A valuation model that calculates the
present value of future cash flows is used to estimate such fair value.
This valuation model incorporates assumptions that market participants
would use in estimating future net servicing income including estimates of
the cost of servicing loans, discount rate, float value, ancillary income,
prepayment speeds and default rates. Any impairment is recognized as a
charge to earnings through a valuation allowance.
Accounting for Stock-Based Compensation. In October 1995, the FASB
issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"). SFAS No. 123 establishes a fair value based method of accounting
for stock-based compensation arrangements with employees, rather than the
intrinsic value based method that is contained in Accounting Principles
Board Opinion No. 25 ("Opinion 25"). However, SFAS No. 123 does not
require an entity to adopt the new fair value based method for purposes of
preparing its basic financial statements. Entities are allowed (1) to
continue to use the intrinsic value based method under Opinion 25 or (2)
to adopt the SFAS No. 123 fair value based method. SFAS No. 123 applies to
all transactions in which an entity acquires goods or services by issuing
equity instruments or by incurring liabilities where the payment amounts
are based on the entity's common stock price, except for employee stock
ownership plans. For entities not adopting the SFAS No. 123 fair value
based method, SFAS No. 123 requires the entity to display in the footnotes
to the financial statements pro forma net earnings and earnings per share
information as if the fair value based method had been adopted. The
accounting requirements of SFAS No. 123 are effective for transactions
entered into in years that begin after December 15, 1995. The disclosure
requirements are effective for financial statements for years beginning
after December 15, 1995. The Company adopted SFAS No. 123 in 1996, by
continuing to account for stock-based compensation under the intrinsic
value based method under Opinion 25. The adoption of SFAS No. 123 had no
effect on the Company's consolidated financial statements, since the
Company granted no stock options in 1995 or 1996. Should the Company grant
stock options in the future, the pro forma effects on net earnings and
earnings per share will be determined as if the fair value based method
had been applied and disclosed in the notes to consolidated financial
statements.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June, 1996, the FASB issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," ("SFAS No. 125") as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS
Statement No. 125" ("SFAS No. 127"). SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments 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 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. SFAS No. 125 is
effective for transfers and servicing of financial assets and the
extinguishments of liabilities occurring after December 31, 1996, and will
be applied prospectively. Earlier or retroactive application of SFAS No.
125 is not permitted. SFAS No. 127 defers cetain provisions of SFAS No.
125 due to logistical issues connected to the application of those
provisions using certain information systems and accounting processes. The
provisions of SFAS No. 127 are not expected to impact the Company's
application of SFAS No. 125. The Company expects that the adoption of SFAS
No. 125 will not have a material impact on its consolidated financial
statements.
<PAGE> 23
[LETTERHEAD OF GRANT THORNTON LLP]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Granite State Bankshares, Inc.
We have audited the accompanying consolidated statements of
financial condition of Granite State Bankshares, Inc. and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the management of Granite State Bankshares, Inc. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Granite State Bankshares, Inc. and subsidiary as of December 31, 1996 and
1995 and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note A5 of notes to consolidated financial
statements, the Company changed its method of accounting for mortgage
servicing rights for the year ended December 31, 1996.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
January 9, 1997
<PAGE> 25
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
--------- ---------
(In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 18,129 $ 17,771
Interest bearing deposits in Federal Home Loan Bank of Boston,
at cost, which approximates market value 17,993 24,239
Securities available for sale (amortized cost $96,384,000 in
1996 and $92,547,000 in 1995) 99,423 95,016
Securities held to maturity (market value $9,493,000 in 1996) 9,500
Stock in Federal Home Loan Bank of Boston 3,215 3,215
Loans held for sale 1,025 1,985
Loans 206,339 190,369
Less: Unearned income (1,860) (2,356)
Allowance for possible loan losses (3,676) (3,704)
---------------------
Net loans 200,803 184,309
Premises and equipment 10,783 9,937
Other real estate owned 1,512 2,691
Other assets 8,050 7,251
---------------------
Total assets $ 370,433 $ 346,414
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Interest bearing deposits $ 272,350 $ 255,208
Noninterest bearing deposits 31,804 31,922
---------------------
Total deposits 304,154 287,130
Securities sold under agreements to repurchase 31,535 26,189
Long-term debt 691 728
Other liabilities 2,757 2,578
---------------------
Total liabilities 339,137 316,625
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized 7,500,000 shares;
none issued
Common stock, $1.00 par value; authorized 12,500,000 shares;
2,579,133 and 2,535,833 shares issued at December 31, 1996 and
1995, respectively 2,579 2,536
Additional paid-in capital 19,518 19,218
---------------------
22,097 21,754
Retained earnings 13,193 10,529
Unrealized gain on securities available for sale, net of related
tax effects 2,006 1,630
---------------------
37,296 33,913
Less: Treasury stock, at cost, 600,080 and 500,252 shares at
December 31, 1996 and 1995, respectively (6,000) (4,124)
---------------------
Total stockholders' equity 31,296 29,789
---------------------
Total liabilities and stockholders' equity $ 370,433 $ 346,414
=====================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 26
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income
Loans $ 18,073 $ 18,327 $ 15,587
Debt securities available for sale 5,853 4,522 2,789
Marketable equity securities available for sale 257 165 126
Securities held to maturity 394 533 1,114
Interest bearing deposits in Federal Home Loan Bank
of Boston 767 814 149
Dividends on Federal Home Loan Bank of Boston stock 206 221 184
Trading securities 395
----------------------------------
Total interest and dividend income 25,550 24,582 20,344
Interest expense
Deposits 10,636 9,478 6,347
Short-term borrowings 1,155 1,483 1,342
Long-term debt 51 12 15
----------------------------------
Total interest expense 11,842 10,973 7,704
----------------------------------
Net interest and dividend income 13,708 13,609 12,640
Provision for possible loan losses 650 735 600
----------------------------------
Net interest and dividend income after provision
for possible loan losses 13,058 12,874 12,040
Noninterest income
Customer account fees and service charges 941 969 988
Mortgage service fees 677 703 696
Net losses on trading securities (141)
Net gains on sales of securities available for sale 687 326 195
Net gains on sales of loans 554 316 261
Other 322 201 198
----------------------------------
3,181 2,515 2,197
Noninterest expense
Salaries and benefits 5,442 5,044 4,715
Occupancy and equipment 1,987 1,728 1,832
Other real estate owned 227 388 489
Other 2,858 2,921 3,126
----------------------------------
10,514 10,081 10,162
----------------------------------
Earnings before income taxes 5,725 5,308 4,075
Income taxes 1,945 1,873 1,252
----------------------------------
NET EARNINGS $ 3,780 $ 3,435 $ 2,823
==================================
Net earnings per common share--primary $ 1.79 $ 1.58 $ 1.27
==================================
Net earnings per common share--fully diluted $ 1.78 $ 1.57 $ 1.26
==================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Additional Securities Unearned
Common Paid-in Retained Treasury Available Compensation
Stock Capital Earnings Stock for Sale, net ESOP Total
------- ---------- -------- -------- -------------- ------------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1993 $ 2,536 $ 19,218 $ 6,029 $ (2,540) $ 288 $ (150) $ 25,381
Net earnings 2,823 2,823
Payment of Employee Stock Ownership
Plan Indebtedness 86 86
Cash dividends declared on common
stock, $.36 per share (769) (769)
Unrealized loss on securities
available for sale, net of related
income taxes (991) (991)
Purchase of common stock for treasury (889) (889)
--------------------------------------------------------------------------------------
Balance as of December 31, 1994 2,536 19,218 8,083 (3,429) (703) (64) 25,641
Net earnings 3,435 3,435
Payment of Employee Stock Ownership
Plan Indebtedness 64 64
Cash dividends declared on common
stock, $.48 per share (989) (989)
Unrealized gain on securities
available for sale, net of related
income taxes 2,333 2,333
Purchase of common stock for treasury (695) (695)
--------------------------------------------------------------------------------------
Balance as of December 31, 1995 2,536 19,218 10,529 (4,124) 1,630 0 29,789
Net earnings 3,780 3,780
Cash dividends declared on common
stock, $.56 per share (1,116) (1,116)
Issuance of common stock upon exercise
of stock options 43 174 217
Tax benefit associated with the
exercise of non-statutory stock options 126 126
Unrealized gain on securities available
for sale, net of related income taxes 376 376
Purchase of common stock for treasury (1,876) (1,876)
--------------------------------------------------------------------------------------
Balance as of December 31, 1996 $ 2,579 $ 19,518 $ 13,193 $ (6,000) $ 2,006 $ 0 $ 31,296
======================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) in cash and due from banks
Cash flows from operating activities
Net earnings $ 3,780 $ 3,435 $ 2,823
Adjustments to reconcile net earnings to net cash provided by
operating activities
Provision for possible loan losses 650 735 600
Provision for depreciation and amortization 1,277 1,199 1,295
Accretion of security discounts net of premium amortizaton (59) (125) (391)
Net decrease in trading securities 23,362
Provision for loss on other real estate owned 101 203 173
Deferred income taxes (benefits) 107 (107) (139)
Realized gains on sales of securities available for sale, net (687) (326) (195)
Realized losses on trading securities 141
Loans originated for sale (27,205) (29,159) (19,003)
Proceeds from sale of loans originated for sale 28,719 28,154 21,891
(Increase) decrease in other assets (822) 883 (2,329)
Increase (decrease) in other liabilities (155) (115) 1,210
Decrease in unearned compensation--ESOP 64 86
Realized gains on sales of loans (554) (316) (261)
Realization of unearned income (435) (574) (434)
Realized gains on sales of other real estate owned (149) (162) (67)
--------------------------------
Net cash provided by operating activities 4,568 3,789 28,762
--------------------------------
Cash flows from investing activities
Proceeds from sales of securities available for sale 18,289 1,238 4,244
Proceeds from maturities of securities available for sale 42,000 11,998 15,000
Purchase of securities available for sale (63,380) (31,236) (70,522)
Purchase of securities held to maturity (12,500) (503)
Proceeds from maturities of securities held to maturity 3,000 15,500 14,500
Purchase of Federal Home Loan Bank of Boston stock (1,996)
Loan (originations) repayments, net (18,063) 1,183 (10,506)
Purchase of premises and equipment (1,694) (913) (623)
Advances made on other real estate owned (22) (52)
Net (increase) decrease in interest-bearing deposits in Federal
Home Loan Bank of Boston 6,246 (24,213) 12,480
Proceeds from sales of other real estate owned 2,581 2,073 2,569
Other (280) (6) (57)
--------------------------------
Net cash used in investing activities (23,801) (24,398) (35,466)
--------------------------------
Cash flows from financing activities
Net increase (decrease) in demand, NOW, money market and
savings accounts 6,791 17,656 (14,323)
Net increase (decrease) in time certificates 10,233 29,445 (7,020)
Net increase in securities sold under agreements to repurchase 5,346 4,221 8,204
Increase (decrease) in short-term borrowings from Federal Home
Loan Bank of Boston (20,904) 20,904
Increase (decrease) in long-term borrowings from Federal Home
Loan Bank of Boston (37) 464 264
Repayment on liability relating to ESOP (64) (86)
Dividends paid on common stock (1,083) (998) (688)
Issuance of common stock upon exercise of stock options 217
Purchase of treasury stock (1,876) (695) (889)
--------------------------------
Net cash provided by financing activities 19,591 29,125 6,366
--------------------------------
Net increase (decrease) in cash and due from banks 358 8,516 (338)
Cash and due from banks at beginning of year 17,771 9,255 9,593
--------------------------------
Cash and due from banks at end of year $ 18,129 $ 17,771 $ 9,255
================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Summary of Significant Accounting Policies
The accounting and reporting policies of Granite State Bankshares,
Inc. (the "Company") and its wholly-owned subsidiary, Granite Bank (the
"subsidiary bank") conform to generally accepted accounting principles and
to general practices within the banking industry.
The subsidiary bank has been and continues to be a community
oriented commercial bank offering a variety of financial services. The
principal business of the subsidiary bank consists of attracting deposits
from the general public and underwriting loans secured by residential and
commercial real estate and other loans. The subsidiary bank also
originates fixed rate residential real estate loans for sale in the
secondary mortgage market. The subsidiary bank has nine full service
offices and an additional thirteen remote automatic teller locations. The
subsidiary bank is a full service community bank with a diversified
lending operation that services Cheshire, Hillsborough, Strafford and
Rockingham counties, New Hampshire.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the dates of the balance sheets, and income and
expense for the periods. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change in
the near-term relate to the determination of the allowance for possible
loan losses and valuation of other real estate owned. In connection with
the determination of the allowance for possible loan losses and the
carrying value of other real estate owned, management obtains independent
appraisals for significant properties.
A substantial portion of the Company's loans are secured by real
estate in New Hampshire. In addition, a majority of other real estate
owned is located in New Hampshire. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio
and the recovery of all the other real estate owned is susceptible to
changing conditions in New Hampshire.
Certain 1995 and 1994 information has been reclassified to conform
with the 1996 presentation. The following is a description of the
significant accounting policies.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and the subsidiary bank. All significant intercompany
transactions and balances have been eliminated in consolidation.
2. Securities
The Company follows Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Under SFAS No.
115, debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity and reported at
amortized cost; debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
trading and reported at fair value, with unrealized gains and losses
included in earnings; and debt and equity securities not classified as
either held to maturity or trading are classified as available for sale
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net
of estimated income taxes. At December 31, 1996 and 1995 the Company had
no securities classified as trading securities and at December 31, 1995
had no securities classified as held to maturity.
Premiums and discounts on securities are amortized or accreted into
income on the straight-line method over the life of the investments.
Income recognized by use of this method does not differ materially from
that which would be recognized by use of the level-yield method. If a
decline in fair value below the amortized cost basis of a security is
judged to be other than temporary, the cost basis of the security is
written down to fair value as a new cost basis and the amount of the
write-down is included as a charge against net gains or losses on
securities. Gains and losses on the sale of securities are recognized at
the time of sale on a specific identification basis.
In October 1994, the FASB issued SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments."
SFAS No. 119 was effective for financial statements issued after December
15, 1994 and requires financial statement disclosure of certain derivative
financial instruments, defined as futures, forwards, swaps, option
contracts, or other financial instruments with similar characteristics.
The disclosure requirements of SFAS No. 119 had no material effect on the
Company's consolidated financial condition or results of operations, as
the Company has not invested in derivative financial instruments, as
defined in SFAS No. 119.
3. Loans
Real estate mortgage loans and other loans are stated at the amount
of unpaid principal, less unearned income and the allowance for possible
loan losses.
<PAGE> 30
Interest on loans is included in income as earned based on rates
applied to principal amounts outstanding. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal, or when a loan becomes contractually
past due by ninety days, unless the loan is well secured and in the
process of collection. When a loan is placed on nonaccrual status, all
interest previously accrued is reversed against current period interest
income. Interest subsequently received on nonaccrual loans is either
applied against principal or recorded as income according to management's
judgment as to the collectibility of principal.
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," on January 1, 1995. This standard requires that a
creditor measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, a creditor may measure impairment based on a
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a
creditor must measure impairment based on the fair value of the collateral
when the creditor determines that foreclosure is probable. In October
1994, SFAS No. 114 was amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures," which
allows creditors to use their existing methods for recognizing interest
income on impaired loans. Because the Company already recognized such
reductions of value on impaired loans through its provision for possible
loan losses, the adoption of SFAS No. 114, as amended by SFAS No. 118, did
not have a material impact on its financial condition or results of
operations.
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and amortized as an adjustment of the
related loan yield over the contractual life of the loans.
4. Allowance for Possible Loan Losses
The adequacy of the allowance for possible loan losses is evaluated
on a regular basis by management. Factors considered in evaluating the
adequacy of the allowance include previous loss experience, current
economic conditions and their effect on borrowers and the performance of
individual loans in relation to contract terms. The provision for possible
loan losses charged to operations is based upon management's judgment of
the amount necessary to maintain the allowance at a level adequate to
absorb possible losses. Loan losses are charged against the allowance when
management believes the collectibility of the principal is unlikely, and
recoveries are credited to the allowance when received.
Management believes that the allowance for possible loan losses is
adequate. While management evaluates the allowance for possible loan
losses based upon available information, future additions to the allowance
may be necessary. Additionally, regulatory agencies review the Company's
allowance for possible loan losses as part of their examination process.
Such agencies may require the Company to recognize additions to the
allowance based on judgments which may be different from those of
management.
5. Mortgage Banking Activities
Mortgage loans held for sale into the secondary market and
commitments to fund such loans are carried at the lower of cost or
estimated market value as determined by outstanding investor and
origination commitments or, in the absence of such commitments, current
investor yield requirements. Valuation adjustments are charged against
gain/loss on sales of mortgage loans. Gains or losses on sales of mortgage
loans are recognized at the time of the sale.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an Amendment of FASB Statement No. 65." The Statement,
which was prospectively adopted by the Company on January 1, 1996,
requires the Company to recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired.
When the Company acquires mortgage servicing rights either through the
purchase or origination of mortgage loans (originated mortgage loan
servicing rights) and sells those loans with servicing rights retained, it
allocates the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on
their relative fair values. As a result of adoption, the Company recorded
additional gains on sales of mortgage loans of approximately $257,000 and
amortization expense on originated mortgage servicing rights of $35,000
for the year ended December 31, 1996. The after tax impact of these items
increased net earnings by $136,000, or $.06 per share.
Purchased and originated loan servicing rights are amortized on a
basis which results in approximately level rates of return in proportion
to, and over the period of, estimated net servicing income.
On a quarterly basis, the Company assesses the carrying values of
originated and purchased mortgage servicing rights for impairment based on
the fair value of such rights. A valuation model that calculates the
present value
<PAGE> 31
of future cash flows is used to estimate such fair value. This valuation
model incorporates assumptions that market participants would use in
estimating future net servicing income including estimates of the cost of
servicing loans, discount rate, float value, ancillary income, prepayment
speeds and default rates. Any impairment is recognized as a charge to
earnings through a valuation allowance.
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Useful lives are 15--50 years
for bank buildings and 3--10 years for furniture and equipment.
Gains or losses on routine dispositions are credited or charged to
income. Maintenance and repairs are charged to expense as incurred, and
improvements are capitalized.
7. Other Real Estate Owned
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure.
Other real estate owned is recorded at the lower of the carrying value of
the loan or the fair value of the property received less a valuation
allowance for estimated costs to sell. Loan losses arising from the
acquisition of such properties are charged against the allowance for
possible loan losses. Provisions to reduce the carrying value to net
realizable value are charged to current period earnings as realized and
are reflected as an additional valuation allowance. Operating expenses and
gains and losses upon disposition are reflected in earnings as realized.
8. Other Assets
Goodwill arising from acquisitions is included in other assets, net
of accumulated amortization, and is amortized on the straight-line basis
over 15 years.
Core deposit intangibles arising from acquisitions are included in
other assets, net of accumulated amortization, and are amortized on an
accelerated method over 8 years.
Mortgage servicing rights are included in other assets, net of
accumulated amortization, and are amortized on a basis which results in
approximately level rates of return in proportion to, and over the period
of, estimated net servicing income.
9. Impairment of Long-Lived Assets
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS No. 121"). SFAS No. 121 is effective for years beginning after
December 15, 1995 and establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement
requires that long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's adoption of SFAS No. 121 on January 1, 1996, had no significant
effect on its consolidated financial statements.
10. Fair Value of Financial Instruments
In accordance with SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, the Company is required to disclose estimated fair
values of financial instruments. Fair value estimates, methods, and
assumptions are set forth below in note T of Notes to Consolidated
Financial Statements.
11. Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and the respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under the asset and liability method,
the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in earnings in the period that includes the enactment date.
Tax credits are accounted for under the flow-through method as a
reduction of income tax expense in the period they are realized.
12. Retirement and Benefit Plans
The Company and its subsidiary bank have a non-contributory defined
benefit Pension Plan covering substan-
<PAGE> 32
tially all of the Company's employees. Contributions are intended to provide
for benefits attributed to services rendered to date and for those expected
to be earned in the future.
The Company sponsors a Supplemental Executive Retirement Plan
("SERP"). The SERP is a nonqualified plan designed to provide supplemental
retirement benefits to certain key employees, whose benefits under the
Company's other retirement plans are limited by Federal tax laws.
On August 19, 1986, the Company established an Employee Stock
Ownership Plan ("ESOP"), covering eligible employees with one year of
service as defined by the ESOP. In November 1993, the American Institute
of Certified Public Accountants issued Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6").
SOP 93-6 addresses the accounting for shares of stock issued to employees
by an employee stock ownership plan. SOP 93-6 requires that the employer
record compensation expense in an amount equal to the fair value of shares
committed to be released from the ESOP to employees. SOP 93-6 was
effective for years beginning after December 15, 1993 and relates to
shares purchased by an ESOP after December 31, 1992. For shares purchased
by the ESOP prior to December 31, 1992, the shares allocated method is
used to recognize compensation expense in the consolidated statements of
earnings. The Company's adoption of SOP 93-6 on January 1, 1994 had no
significant impact on consolidated financial position or results of
operations at December 31, 1994 or for the year then ended.
13. Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a
fair value based method of accounting for stock-based compensation
arrangements with employees, rather than the intrinsic value based method
that is contained in Accounting Principles Board Opinion No. 25 ("Opinion
25"). However, SFAS No. 123 does not require an entity to adopt the new
fair value based method for purposes of preparing its basic financial
statements. Entities are allowed (1) to continue to use the intrinsic
value based method under Opinion 25 or (2) to adopt the SFAS No. 123 fair
value based method. SFAS No. 123 applies to all transactions in which an
entity acquires goods or services by issuing equity instruments or by
incurring liabilities where the payment amounts are based on the entity's
common stock price, except for employee stock ownership plans. For
entities not adopting the SFAS No. 123 fair value based method, SFAS No.
123 requires the entity to display in the footnotes to the financial
statements pro forma net earnings and earnings per share information as if
the fair value based method had been adopted. The accounting requirements
of SFAS No. 123 are effective for transactions entered into in years that
begin after December 15, 1995. The disclosure requirements are effective
for financial statements for years beginning after December 15, 1995. The
Company adopted SFAS No. 123 in 1996, by continuing to account for stock-
based compensation under the intrinsic value based method under Opinion
25. The adoption of SFAS No. 123 had no effect on the Company's
consolidated financial statements, since the Company granted no stock
options in 1995 or 1996. Should the Company grant stock options in the
future, the proforma effects on net earnings and earnings per share will
be determined as if the fair value based method had been applied and
disclosed in the notes to the consolidated financial statements.
14. Earnings Per Common Share
Primary earnings per common share for 1996, 1995 and 1994 were
determined by dividing net earnings by the weighted average number of
common shares outstanding. Outstanding common shares also include common
stock equivalents which consist of certain outstanding stock options
utilizing the treasury stock method, based upon the average market price
of common stock during the year. Fully diluted earnings per share for
1996, 1995 and 1994 were determined by dividing net earnings by the
weighted average number of outstanding shares on a fully diluted basis. On
a fully diluted basis, outstanding common shares include the outstanding
stock options utilizing the treasury stock method, based upon the year end
market price of the common stock. The average number of common shares
outstanding (including common stock equivalents) for 1996, 1995 and 1994
were 2,112,099, 2,175,734 and 2,229,075 shares, respectively (2,118,860,
2,183,478 and 2,232,986 shares, respectively, fully diluted).
15. Transfers and Servicing of Financial Assets and Extin-
guishments of Liabilities
During 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
("SFAS No. 125") and SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125" ("SFAS No. 127"). SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales
<PAGE> 33
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 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. SFAS No.
125 is effective for transfers and servicing of financial assets and the
extinguishments of liabilities occurring after December 31, 1996, and will be
applied prospectively. Earlier or retroactive application of this Statement
is not permitted. SFAS No. 127 defers certain provisions of SFAS No. 125 due
to logistical issues connected to the application of those provisions using
certain information systems and accounting processes. The provisions of SFAS
No. 127 are not expected to impact the Company's application of SFAS No. 125.
The Company expects that the adoption of SFAS No. 125 will not have a material
impact on its consolidated financial statements.
16. Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and due from banks.
NOTE B--Cash and Due From Banks
The Federal Reserve Bank requires the subsidiary bank to maintain
average reserve balances. The average amount of these reserve balances for
the year ended December 31, 1996 was approximately $9,302,000.
NOTE C--Securities
The amortized cost and estimated market values of securities at
December 31, were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Securities held to maturity
At December 31, 1996
US Government agency obligations $ 9,500 $ 4 $ 11 $ 9,493
----------------------------------------------
Total securities held to maturity $ 9,500 $ 4 $ 11 $ 9,493
==============================================
Securities available for sale
At December 31, 1996
US Treasury obligations $ 25,847 $ 26 $ 21 $ 25,852
US Government agency obligations 52,749 13 204 52,558
Other corporate obligations 5,476 27 5,449
Mutual Fund 5,239 5 5,244
Marketable equity securities 7,073 3,252 5 10,320
----------------------------------------------
Total securities available for sale $ 96,384 $ 3,296 $ 257 $ 99,423
==============================================
Securities available for sale
At December 31, 1995
US Treasury obligations $ 59,016 $ 452 $ 16 $ 59,452
US Government agency obligations 17,000 7 17,007
Other corporate obligations 9,495 51 9,444
Mutual Fund 3,000 9 3,009
Marketable equity securities 4,036 2,077 9 6,104
----------------------------------------------
Total securities available for sale $ 92,547 $ 2,545 $ 76 $ 95,016
==============================================
</TABLE>
<PAGE> 34
As a member of the Federal Home Loan Bank of Boston ("FHLBB"), the
subsidiary bank is required to invest in $100 par value stock of the FHLBB
in the amount of 1% of its outstanding loans secured by residential
housing, or 1% of 30% of total assets, or 5% of its outstanding advances
from the FHLBB, whichever is higher. When such stock is redeemed, the
subsidiary bank would receive from the FHLBB an amount equal to the par
value of the stock. As of December 31, 1996 and 1995, the subsidiary bank
had investments in FHLBB stock of $3,215,000 and $3,215,000, respectively.
Such investments are reflected separately in the Consolidated Statements
of Financial Condition.
Gross realized gains and gross realized losses on sales of
securities available for sale for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
Realized Realized Realized Realized Realized Realized
Gain Loss Gain Loss Gain Loss
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities
Debt securities $ 6 $ 8 $ 8 $ 22
Marketable equity securities 689 $ 326 209
--------------------------------------------------------------
$ 695 $ 8 $ 326 $ 0 $ 217 $ 22
==============================================================
</TABLE>
At December 31, 1996, U. S. Treasury and U. S. Government Agency
Obligations with carrying and market values of $40,345,000 were pledged as
collateral for securities sold under agreements to repurchase and for
government deposit accounts.
The following tables set forth the maturity distribution of debt
securities held to maturity and available for sale at amortized cost and
estimated market value at December 31, 1996. Actual maturities may differ
from contractual maturities because certain issuers have the right to call
obligations without call penalties.
<TABLE>
<CAPTION>
Over 1 Year
Within Through
1 Year 5 Years Total
-------- ----------- --------
(In Thousands)
<S> <C> <C> <C>
Amortized Cost
At December 31, 1996
Securities held to maturity
US Government agency obligations $ 0 $ 9,500 $ 9,500
===================================
Securities available for sale
US Treasury obligations $ 16,015 $ 9,832 $ 25,847
US Government agency obligations 52,749 52,749
Other corporate obligations 5,476 5,476
-----------------------------------
Total debt securities available for sale $ 16,015 $ 68,057 $ 84,072
===================================
Estimated Market Value
At December 31, 1996
Securities held to maturity
US Government agency obligations $ 0 $ 9,493 $ 9,493
===================================
Securities available for sale
US Treasury obligations $ 16,036 $ 9,816 $ 25,852
US Government agency obligations 52,558 52,558
Other corporate obligations 5,449 5,449
-----------------------------------
Total debt securities available for sale $ 16,036 $ 67,823 $ 83,859
===================================
</TABLE>
<PAGE> 35
NOTE D--Loans
Loans consist of the following at:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
--------- ---------
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 9,849 $ 10,696
Real estate--residential 122,561 111,578
Real estate--commercial 58,302 52,555
Real estate--construction and land development 3,030 2,676
Installment 4,488 4,438
Other 8,109 8,426
----------------------
Total loans 206,339 190,369
Less:
Unearned income (1,860) (2,356)
Allowance for possible loan losses (3,676) (3,704)
----------------------
Net loans $ 200,803 $ 184,309
======================
</TABLE>
At December 31, 1996 and 1995, loans which were on nonaccrual status
were $2,022,000 and $1,798,000, respectively. Interest income which would
have been accrued on nonaccrual loans, had they performed in accordance
with the terms of their contracts, for the years ended December 31, 1996,
1995 and 1994, was $263,000, $230,000 and $238,000, respectively.
Interest income recognized on nonaccrual loans in 1996, 1995 and 1994
amounted to $93,000, $56,000 and $39,000, respectively.
The balance of impaired loans was $805,000 and $1,022,000,
respectively, at December 31, 1996 and 1995. The Company has identified a
loan as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan agreements.
The allowance for possible loan losses associated with impaired loans
allocated from and part of the general allowance for possible loan losses
(see note E), upon the adoption of SFAS No. 114, on January 1, 1995 was
$864,000. During 1996 and 1995, provisions to the allowance for impaired
loans amounted to $377,000 and $553,000, respectively, and impaired loans
charged off amounted to $578,000 and $1,050,000, respectively. The
allowance for possible loan losses associated with impaired loans at
December 31, 1996 and 1995 was $166,000 and $367,000, respectively. At
December 31, 1996 and 1995, there were no impaired loans which did not
have an allowance for possible loan losses determined in accordance with
SFAS No. 114. The average recorded investment in impaired loans was
$634,000 and $1,482,000, respectively, in 1996 and 1995 and the income
recognized on impaired loans during 1996 and 1995 was $4,000 and $19,000,
respectively. Total cash collected on impaired loans during 1996 and 1995
was $770,000 and $103,000, respectively, of which $766,000 and $84,000,
respectively, was credited to the principal balance outstanding on such
loans. Interest which would have been accrued on impaired loans during
1996 and 1995, had they performed in accordance with the terms of their
contracts, was $61,000 and $166,000, respectively. The Company's policy
for interest income recognition on impaired loans is to recognize income
on nonaccrual loans under the cash basis when the loans are both current
and the collateral on the loan is sufficient to cover the outstanding
obligation to the Company; if these factors do not exist, the Company does
not recognize income.
Unearned income at December 31, 1996 and 1995, includes $1,369,000
and $1,743,000, respectively, in net loan discounts on loans acquired in
connection with the acquisition of First Northern Co-operative Bank in
August of 1991. Additionally, at December 31, 1996 and 1995 unearned
income includes $128,000 and $144,000, respectively, in net loan discounts
on other loans acquired. Discounts on acquired loans are amortized as a
yield adjustment over the estimated lives of the respective loans.
The Company's lending activities are conducted principally in New
Hampshire and to a lesser extent in selected areas in other New England
states. The Company grants single family and multi-family residential
loans, commercial real estate loans, commercial loans, and a variety of
consumer loans. In addition, the Company grants loans for the construction
of residential homes, multi-family properties and commercial real estate
properties. Most loans granted by the Company are collateralized by real
estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally
dependent on the level of overall economic activity within the borrowers'
geographic areas, and real estate values. The ability and willingness of
commercial real estate, commercial and construction loan borrowers to
honor their repayment commitments is generally dependent on the health of
the real estate economic sector in the borrowers' geographic areas, and
the general economy.
At December 31, 1996 and 1995, the Company's subsidiary serviced
real estate loans sold to others in the amounts of $174,039,000 and
$173,017,000, respectively.
<PAGE> 36
NOTE E--Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 3,704 $ 4,230 $ 4,004
Provision for possible loan losses 650 735 600
Loans charged off (1,193) (1,405) (421)
Recoveries of loans previously charged off 515 144 47
---------------------------
Balance at end of year $ 3,676 $ 3,704 $ 4,230
===========================
</TABLE>
NOTE F--Loans to Related Parties
The Company's banking subsidiary has granted loans to its officers
and directors, and those of the Company and to their associates. The
aggregate amount of these loans was $2,549,000 and $2,141,000 at December
31, 1996 and 1995, respectively. During 1996, $1,149,000 of new loans were
made and repayments totaled $633,000. Approximately $108,000 of related
party loans at December 31, 1995 were loans to officers and directors who
were no longer associated with the Company in those capacities at December
31, 1996.
NOTE G--Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
-------- --------
(In Thousands)
<S> <C> <C>
Bank buildings $ 9,614 $ 8,870
Leasehold improvements 150 187
Furniture and equipment 5,902 5,128
--------------------
15,666 14,185
Less: Accumulated depreciation 6,945 6,305
--------------------
8,721 7,880
Land 2,047 2,040
Construction in progress 15 17
--------------------
$ 10,783 $ 9,937
====================
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and
1994 was $892,000, $796,000 and $785,000, respectively.
NOTE H--Other Real Estate Owned
A summary of other real estate owned follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Condominiums and apartment projects $ 340 $ 266
Single family housing projects 775 787
Retail and office 426
Non-retail commercial 556 1,593
Residential 306 75
-------------------
1,977 3,147
Less:Valuation allowance 465 456
-------------------
$ 1,512 $ 2,691
===================
</TABLE>
<PAGE> 37
An analysis of other real estate owned follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,691 $ 3,009 $ 4,269
Other real estate owned acquired 1,354 1,774 1,363
Advances for construction and other 22 52
Sales proceeds (2,581) (2,073) (2,569)
Gains on sales, net 149 162 67
Provisions for loss subsequent to foreclosure (101) (203) (173)
-----------------------------
Balance at end of year $ 1,512 $ 2,691 $ 3,009
=============================
</TABLE>
An analysis of other real estate owned expense follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
------ ------ -----
(In Thousands)
<S> <C> <C> <C>
Foreclosure and holding costs, net $ 275 $ 347 $ 383
Provision for loss subsequent to foreclosure 101 203 173
Gains on sales, net (149) (162) (67)
-------------------------
$ 227 $ 388 $ 489
=========================
</TABLE>
Changes in the valuation allowance for other real estate owned are
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
----- ------ -----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 456 $ 496 $ 409
Provision for loss 101 203 173
Charge offs, net (92) (243) (86)
-------------------------
Balance at end of year $ 465 $ 456 $ 496
=========================
</TABLE>
NOTE I--Other Assets
Goodwill, core deposit intangibles and mortgage servicing rights
included in other assets at December 31, consisted of the following:
<TABLE>
<CAPTION>
1996
-----------------------------------
Net
Original Accumulated Book
Amount Amortization Value
-------- ------------ -------
(In Thousands)
<S> <C> <C> <C>
Goodwill $ 3,682 $ 1,553 $ 2,129
===================================
Core deposit intangibles $ 879 $ 863 $ 16
===================================
Mortgage servicing rights $ 1,001 $ 666 $ 335
===================================
<CAPTION>
1995
-----------------------------------
Net
Original Accumulated Book
Amount Amortization Value
-------- ------------ -------
(In Thousands)
<S> <C> <C> <C>
Goodwill $ 3,682 $ 1,308 $ 2,374
===================================
Core deposit intangibles $ 879 $ 833 $ 46
===================================
Mortgage servicing rights $ 729 $ 556 $ 173
===================================
</TABLE>
Amortization expense for the years ended December 31, 1996, 1995 and
1994 was $385,000, $403,000 and $468,000, respectively.
NOTE J--Interest Bearing Deposits
Interest bearing deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
--------- ---------
(In Thousands)
<S> <C> <C>
NOW and Super NOW accounts $ 108,941 $ 90,681
Savings accounts 36,217 41,914
Money market deposit accounts 11,595 17,249
Time certificates 115,597 105,364
----------------------
$ 272,350 $ 255,208
======================
</TABLE>
<PAGE> 38
Maturities of time certificates after December 31, 1996 are
$86,157,000 in 1997, $21,832,000 in 1998, $5,164,000 in 1999, $1,351,000
in 2000, $1,084,000 in 2001 and $9,000 in years thereafter.
Time certificates with balances of $100,000 or more at December 31,
1996 and 1995 totaled $12,274,000 and $11,983,000, respectively.
NOTE K--Borrowings
Securities Sold Under Agreements to Repurchase
Short-term overnight borrowings in the form of securities sold under
agreements to repurchase at December 31, 1996 and 1995, totaled
$31,535,000 and $26,189,000, respectively. Such borrowings were
collateralized at December 31, 1996 by a portion of the Company's U.S.
Treasury and U.S. Government agency securities with a carrying value and
estimated market value of $38,840,000 (see note C). The collateral is
maintained under the control of the Company in a separate custodial
account at the Federal Home Loan Bank of Boston. The weighted average
interest rate on those borrowings was 4.66% and 4.72%, respectively, at
December 31, 1996 and 1995.
The maximum amount of securities sold under agreements to repurchase
at any month end during 1996, 1995 and 1994, were $31,535,000, $28,298,000
and $21,968,000, respectively. The average amount of securities sold
under agreements to repurchase in 1996, 1995 and 1994 were $24,727,000,
$21,133,000 and $15,500,000, respectively. The average cost of securities
sold under agreements to repurchase was 4.67%, 5.24% and 4.16% during
1996, 1995 and 1994, respectively.
Other Short-term Borrowings
The Company's subsidiary bank maintains a line of credit with the
FHLBB to meet short or long-term financing needs that may arise. As of
December 31, 1996 and 1995, there were no outstanding short-term FHLBB
borrowings.
Short and long-term borrowings from the FHLBB are secured by a
blanket lien on substantially all unencumbered interest-earning assets and
FHLBB stock held. The Company's subsidiary bank is able to commingle,
encumber or dispose of any collateral held subject to its ability to
maintain specific "qualifying" collateral levels in excess of collateral
maintenance requirements and meet minimum capital ratios, both of which
were met as of December 31, 1996 and 1995.
Based upon "qualifying" collateral held, the Company's subsidiary
bank had a total borrowing capacity with the FHLBB as of December 31, 1996
of approximately $155,058,000, of which approximately $154,367,000 was
still available.
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
----- -----
(In Thousands)
<S> <C> <C>
FHLBB long term borrowings
Advances with monthly payments of principal and
interest, weighted average interest rate of
6.13%, final payment due in October, 2005 $ 432 $ 467
Advances with monthly payments of principal and
interest, with interest at the rate of 5.00%
per annum, final payment due in August, 2014 73 75
Advances maturing at various dates in 2014, with
monthly payments of interest only at the rate
of 5.00% per annum 186 186
--------------
$ 691 $ 728
==============
</TABLE>
Principal payments due on long-term debt after December 31, 1996 are
$40,000 in 1997, $43,000 in 1998, $45,000 in 1999, $48,000 in 2000,
$51,000 in 2001 and $464,000 in years thereafter.
NOTE L--Commitments and Contingencies
Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to originate
loans, standby letters of credit, and forward commitments. The instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated statement of financial
condition. The contract or notional amount of those instruments reflects
the extent of involvement the Company has in particular classes of
financial instruments.
<PAGE> 39
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for loan commitments,
standby letters of credit and recourse arrangements is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. For forward commitments, the contract or
notional amounts do not represent exposure to credit loss. The Company
controls the credit risk of its forward commitments through credit
approvals, limits, and monitoring procedures. There were no forward
commitments outstanding at December 31, 1996 and 1995.
Financial instruments with off-balance sheet risk at December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
--------------------
1996 1995
-------- --------
(In Thousands)
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to originate loans $ 5,686 $ 7,646
Unused lines and standby letters of credit 16,435 12,646
Unadvanced portions of construction loans 675 532
</TABLE>
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based upon management's credit
evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
Lease Commitments
The Company, through its subsidiary bank, leases a branch office and
various parcels of land on which it has constructed automatic teller
machines. The leases are classified as operating leases and expire at
various dates through 1999. Most of the leases have renewal options.
Minimum lease payments through 1999 are not significant. Rent expense for
the years ending December 31, 1996, 1995 and 1994 was $88,000, $91,000 and
$83,000, respectively.
Employment Agreements
The subsidiary bank and the Company have entered into employment
agreements with five of its senior officers, one of which provides for a
specified minimum annual compensation and the reimbursement by the Company
for any excise taxes relating to a change in control. However, such
employment may be terminated for cause without incurring any continuing
obligations. All of the agreements generally provide for certain lump sum
severance payments following a "change in control" as defined in the
agreements.
Legal Proceedings
The Company is a defendant in ordinary and routine pending legal
actions incident to its business, none of which is believed by management
to be material to the financial condition of the Company.
NOTE M--Income Taxes
The Company and its subsidiary file a consolidated Federal income
tax return on the accrual basis for taxable years ending December 31.
Income taxes (benefits) reflected in the consolidated statements of
earnings for years ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Federal:
Current $ 1,693 $ 1,980 $ 1,391
Deferred 107 (107) (139)
State:
Current 145
-----------------------------
$ 1,945 $ 1,873 $ 1,252
=============================
</TABLE>
The above amounts reflect a tax provision on securities transactions
of $237,000, $111,000 and $66,000, in 1996, 1995 and 1994, respectively.
<PAGE> 40
The income tax benefit related to the exercise of non-statutory
stock options reduces taxes currently payable and is credited to
additional paid-in capital. Such amounts were $126,000 in 1996 and $0 in
1995 and 1994.
The Company received tax credits from the Community Development
Finance Authority ("CDFA"), a state agency, in exchange for contributions
made by the Company to the CDFA, of property in 1992 and cash in 1994. The
amount of tax credits used to offset state income tax expense in 1996,
1995 and 1994 amounted to $30,000, $82,000 and $126,000, respectively. The
tax credits used in 1995 and 1994 offset all state income tax expense in
those years.
The difference between the total expected income tax expense
computed by applying the Federal income tax rate to earnings before income
tax expense and the reported income tax expense for years ended December
31, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Computed "expected" Federal income tax expense
at statutory rate $ 1,947 $ 1,805 $ 1,386
Increase (decrease) resulting from:
State income tax, net of Federal tax benefit 96
Other (98) 68 (134)
-----------------------------
$ 1,945 $ 1,873 $ 1,252
=============================
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Writedown of marketable equity securities $ 101 $ 101
Writedowns of other real estate owned 54 50
Core deposit intangibles 125 135
Provision for loan losses 67 115
Deferred loan fees 64 58
Capitalized interest 43 45
Mortgage servicing rights 91 94
Supplemental retirement 62
Other 32 39
------------------
577 699
Less: Valuation allowance 0 0
------------------
Total deferred tax assets 577 699
------------------
Deferred tax liabilities:
Unearned income 564 559
Book over tax basis of premises and equipment 428 412
Unrealized gains on securities available for sale 1,033 840
Other 36
------------------
Total deferred tax liabilities 2,025 1,847
------------------
Net deferred tax liability $ 1,448 $ 1,148
==================
</TABLE>
At December 31, 1996 and 1995, net deferred tax liabilities includes
$1,033,000 and $840,000, respectively, in deferred tax liabilities which
are attributable to the tax effects of net unrealized gains on securities
available for sale. Pursuant to SFAS No. 115 and SFAS No. 109, the
corresponding charge has been made directly to stockholders' equity.
Based upon management's evaluation of the likelihood of realization,
no valuation allowance on deferred tax assets has been provided.
<PAGE> 41
NOTE N--Pension Plans
Defined Benefit Pension Plan
The following table sets forth the funded status of the Company's
defined benefit pension plan as of September 30, 1996 and 1995 (the most
recent actuarial valuations):
<TABLE>
<CAPTION>
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $1,800,000 and $1,653,000, respectively $ 1,942 $ 1,810
==================
Projected benefit obligation for service rendered to date $ 2,458 $ 2,281
Plan assets at fair value, primarily fixed income and
equity securities 2,662 2,331
------------------
Plan assets in excess of projected benefit obligation 204 50
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (669) (493)
Unrecognized net liability being recognized over
approximately 12 years 246 301
------------------
Accrued pension cost $ (219) $ (142)
==================
</TABLE>
Net periodic pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 144 $ 129 $ 146
Interest cost on projected benefit obligation 171 156 152
Actual return on plan assets (296) (378) (169)
Net amortization and deferral 142 251 52
-----------------------
Net periodic pension expense $ 161 $ 158 $ 181
=======================
</TABLE>
The weighted average discount rate of 7.75% in 1996, 7.50% in 1995
and 8.25% in 1994, and the rate of increase in future compensation levels
of 5.50% in 1996, 5.50% in 1995 and 6.00% in 1994, were used in
determining the actuarial present value of the projected benefit
obligation. The expected long-term rate of return on assets was 8.00% for
each year.
Supplemental Executive Retirement Plan
Effective January 1, 1993, the Company established a SERP. In August
of 1996, the Company established a Rabbi Trust, which purchased life
insurance policies to satisfy its benefit obligations thereunder. The cash
surrender value of the life insurance policies was $1,294,000 at December
31, 1996 and is carried in Other Assets in the Consolidated Statement of
Financial Condition. Amounts accrued to August of 1996 were paid to and
subsequent annual accruals for expense will be paid annually to trusts for
the benefit of the participants. The present value of future benefits is
being accrued over the term of employment. SERP expense for the years
ended December 31, 1996, 1995 and 1994 amounted to $176,000, $90,000 and
$49,000, respectively.
NOTE O--Employee Stock Ownership Plan (ESOP)
On August 19, 1986, the Company's ESOP purchased 102,900 shares of
the common stock issued in the Company's initial public offering for
$858,000. These funds were obtained by the ESOP through a loan from a
third party lender and repayment of the loan was guaranteed by the
Company. Borrowings under this loan agreement were repaid in full during
1995. Prior to repayment, principal was payable in quarterly installments
of $21,500, with interest at approximately 80% of the prime rate. Company
contributions were the primary source of funds for the ESOP's repayment of
the loan. There were no outstanding borrowings under this loan agreement
at December 31, 1996 and 1995.
Interest expense incurred on ESOP debt was $0, $2,000 and $6,000,
respectively, for the years ended December 31, 1996, 1995 and 1994.
Compensation expense related to the ESOP amounted to $175,000,
$114,000 and $136,000, respectively, for the years ended December 31,
1996, 1995 and 1994 and included additional contributions in excess of
amounts required to service the ESOP debt of $175,000 in 1996 and $50,000
in 1995 and 1994.
Dividends on unallocated shares were insignificant during 1995 and
1994 and there were no unallocated shares in 1996.
<PAGE> 42
At December 31, 1996 and 1995, the total shares of the Company's
common stock owned by the ESOP, all of which were allocated shares, was
188,614 shares and 172,694 shares, respectively.
NOTE P--Stockholders' Equity
Stock Option Plan
On March 18, 1986, the Company adopted an Incentive Stock Option
Plan, whereby incentive or non-statutory options may be granted to certain
key employees of the Company or its subsidiary bank to purchase up to an
aggregate of 210,000 shares of common stock of the Company at a price not
less than fair market value at the date of grant. Effective April 24,
1992, options to purchase 189,000 shares of the Company's common stock
were granted. Such options vested 100% one year after the date of grant
and are exercisable over a period not to exceed 10 years from the date of
grant.
The following summarizes the stock option transactions:
<TABLE>
<CAPTION>
Option Shares
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of year 168,800 168,800 168,800
Granted 0 0 0
Cancelled 0 0 0
Exercised 43,300 0 0
Outstanding at end of year 125,500 168,800 168,800
Exercisable at end of year 125,500 168,800 168,800
Price range of options
Outstanding $5.00 $5.00 $5.00
Exercised $5.00 -- --
Average price of options outstanding $5.00 $5.00 $5.00
</TABLE>
Stock Repurchase Programs
On June 14, 1994, the Company announced a Stock Repurchase Plan
("Plan"), whereby the Company's Board of Directors authorized the
repurchase of up to 9% of its outstanding common shares from time to time.
Shares repurchased under the Plan may be held in treasury, retired or used
for general corporate purposes. As of August 13, 1996, the Company
completed the repurchase of its stock under this Plan.
On August 13, 1996, the Company announced another Stock Repurchase
Program ("Program"), whereby the Company's Board of Directors authorized
the repurchase of up to 10% of its outstanding common shares from time to
time. Shares repurchased under the Program may be held in treasury,
retired or used for general corporate purposes. As of December 31, 1996,
the Company has repurchased 34,989 shares under the Program, representing
1.77% of common shares outstanding at August 13, 1996.
Liquidation Account
Pursuant to certain bank conversion regulations, the subsidiary bank
established a liquidation account in an amount equal to its net worth of
$5,603,000 as of February 28, 1986, for the benefit of eligible account
holders who maintain their savings accounts in the subsidiary bank after
conversion. In the event of a complete liquidation of the subsidiary bank,
and only in such event, eligible account holders would be entitled to
their interest in the liquidation account before any liquidiation
distribution may be made to stockholders. Their interest as to each
savings account will be in the same proportion of the total liquidation
amount as the balance of their savings account on February 28, 1986 was to
the balance in all savings accounts in the subsidiary bank on that date.
However, if the amount in the savings account on any annual closing date
of the subsidiary bank is less than the amount in such account on February
28, 1986, then their interest in the liquidation account will be reduced
by an amount proportionate to any such reduction and their interest will
cease to exist if such savings accounts are closed. Their interest in the
liquidation account will never be increased despite any increase in the
related savings account after February 28, 1986. The balance in the
liquidation account at December 31, 1996 was approximately $674,000
(unaudited).
Capital Requirements
The Company and the subsidiary bank are subject to various
regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the
subsidiary bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsid-
<PAGE> 43
iary bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Company and the subsidiary bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1996, the most recent notification from the
Federal Deposit Insurance Corporation ("FDIC") categorized the Company's
wholly-owned subsidiary bank as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as well-
capitalized, the subsidiary bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There have been no conditions or events since that notification that
management believes would cause a change in the subsidiary bank's
categorization.
The Company's and the subsidiary bank's actual capital amounts and
ratios as of December 31, 1996 and 1995 are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $ 29,791 14.23% $ 16,748 >=8.00% N/A
Subsidiary Bank $ 29,128 14.14% $ 16,485 >=8.00% $ 20,607 >=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 27,161 13.14% $ 8,269 >=4.00% N/A
Subsidiary Bank $ 26,501 13.03% $ 8,138 >=4.00% $ 12,206 >= 6.00%
Tier I Capital (to Average Assets):
Consolidated $ 27,161 7.50% $ 14,494 >=4.00% N/A
Subsidiary Bank $ 26,501 7.32% $ 14,485 >=4.00% $ 18,106 >= 5.00%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated $ 27,992 15.85% $ 14,132 >=8.00% N/A
Subsidiary Bank $ 26,572 15.06% $ 14,114 >=8.00% $ 17,642 >=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 25,739 14.76% $ 6,976 >=4.00% N/A
Subsidiary Bank $ 24,320 13.96% $ 6,967 >=4.00% $ 10,450 >= 6.00%
Tier I Capital (to Average Assets):
Consolidated $ 25,739 7.47% $ 13,788 >=4.00% N/A
Subsidiary Bank $ 24,320 7.08% $ 13,750 >=4.00% $ 17,187 >= 5.00%
</TABLE>
NOTE Q--Restrictions on Subsidiary's Loans, Advances and Dividends
Bank regulatory authorities restrict the amounts available for the
payment of dividends by the subsidiary bank to the Company if the effect
thereof would cause the capital of the subsidiary bank to be reduced below
applicable capital requirements. These restrictions indirectly restrict
the Company's ability to pay common stock dividends.
Federal laws and regulations prohibit the Company from borrowing
from the subsidiary bank unless the loans are secured by specified amounts
of collateral. In addition, such secured loans to the Company from the
subsidiary bank generally are limited to 10 percent of the subsidiary
bank's capital surplus. At December 31, 1996 and
<PAGE> 44
1995, no such transactions existed between the Company and the subsidiary bank.
NOTE R--Other Noninterest Expense
Components of other noninterest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Advertising $ 220 $ 332 $ 235
Amortization 385 403 468
FDIC deposit insurance assessments 73 283 581
FDIC special assessment to recapitalize
Savings Association Insurance Fund 187
Legal fees 118 190 134
Postage and freight 268 243 226
Printing and supplies 263 247 185
Other 1,344 1,223 1,297
-----------------------------
$ 2,858 $ 2,921 $ 3,126
=============================
</TABLE>
Included in other noninterest expense for the year ended December
31, 1996 is $187,000 relating to a special deposit insurance assessment by
the FDIC on the Company's Savings Association Insurance Fund ("SAIF")
assessable Oakar deposits, as a result of legislation signed by the
President on September 30, 1996 to recapitalize the SAIF.
NOTE S--Supplemental Cash Flow Disclosures
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Cash paid for
Interest $ 11,818 $ 10,797 $ 7,710
Income taxes 1,650 1,875 1,450
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
The subsidiary bank acquired other real estate owned through
foreclosure in settlement of loans or accepted deeds in lieu of
foreclosures on real estate loans in the amount of $1,354,000, $1,774,000
and $1,363,000 during the years ended December 31, 1996, 1995 and 1994,
respectively.
Dividends declared and unpaid on common stock at December 31, 1996,
1995 and 1994 were $277,000, $244,000 and $253,000, respectively.
NOTE T--Fair Values of Financial Instruments
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the subsidiary bank's
entire holdings of a particular financial instrument. Because no market
exists for a significant portion of the subsidiary bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities and
therefore, are not valued pursuant to SFAS No. 107, include the mortgage
banking operation, premises and equipment, other real estate owned, core
deposit intangibles, mortgage servicing rights, and goodwill. In addition,
the tax ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates and have
not been considered in many of the estimates.
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:
Cash, due from banks and interest bearing deposits in Federal Home Loan
Bank of Boston.
For cash and short term investments having maturities of 90 days or
less, the carrying amounts reported in the consolidated statements of
financial condition approximate fair values.
<PAGE> 45
Securities held to maturity, securities available for sale and stock in
Federal Home Loan Bank of Boston.
The fair value of securities held to maturity and securities
available for sale is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. Ownership
of stock in FHLBB is restricted to member banks; therefore, the stock is
not traded. The estimated fair value of stock in FHLBB, which approximates
carrying value, represents the price at which the subsidiary bank could
liquidate its holdings.
Loans held for sale
Loans actively traded in the secondary mortgage market have been
valued using current investor yield requirements.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, construction,
and other consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and nonperforming
categories.
The fair value of performing loans, except residential mortgage
loans, is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the subsidiary bank's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions. For
performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources adjusted to reflect
differences in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash flows
are discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market
information and specific borrower information.
Accrued interest receivable
The carrying value of accrued interest receivable on securities and
loans, included in other assets, approximates its fair value.
Deposits
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as non-interest bearing deposits, NOW, Super NOW, regular
savings and money market deposit accounts, is equal to the amount payable
on demand. The fair value estimates do not include the benefit that
results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market. The fair value
estimate of time certificates is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase
The fair value estimate of securities sold under agreements to
repurchase approximates carrying value because they mature within ninety
days and bear market interest rates.
Long-term debt
The fair value of long-term debt is based upon the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered for borrowings of similar maturities.
Accrued interest payable
The carrying value of accrued interest payable on deposits and
borrowings, included in other liabilities, approximates its fair value.
Off-balance sheet instruments
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
excluding those committed for sale to the secondary market, fair value
also considers the difference between current levels of interest rates and
the committed rates. The fair value of financial guarantees written and
letters of credit is based on fees currently charged for similar
agreements or on the
<PAGE> 46
estimated cost to terminate them or otherwise settle the obligations with
the counterparties. It is management's belief that the fair value estimate
of commitments to extend credit approximates carrying value, which is $0, at
December 31, 1996 and 1995, because most mature within one year, do not
present any unanticipated credit concerns and bear market interest rates.
The following presents the carrying value and estimated fair value
of the Company's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1996 1995
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 18,129 $ 18,129 $ 17,771 $ 17,771
Interest bearing deposits in Federal Home Loan
Bank of Boston 17,993 17,993 24,239 24,239
Securities held to maturity 9,500 9,493
Stock in Federal Home Loan Bank of Boston 3,215 3,215 3,215 3,215
Securities available for sale 99,423 99,423 95,016 95,016
Net loans 200,803 206,279 184,309 190,710
Loans held for sale 1,025 1,025 1,985 1,985
Accrued interest receivable 2,406 2,406 2,471 2,471
Financial Liabilities
Deposits (with no stated maturity) 188,557 188,557 181,766 181,766
Time deposits 115,597 115,952 105,364 104,844
Securities sold under agreements to repurchase 31,535 31,535 26,189 26,189
Long-term debt 691 632 728 711
Accrued interest payable 434 434 410 410
</TABLE>
NOTE U--Condensed Parent Company Only Financial Information
Condensed financial statements of Granite State Bankshares, Inc.
(the "Parent Company"), as of December 31, 1996 and 1995, and for the
years ended December 31, 1996, 1995 and 1994, are as follows:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
-------- ---------
(In Thousands)
<S> <C> <C>
Assets
Interest bearing deposits in subsidiary bank $ 719 $ 1,467
Investment in subsidiary bank, at equity 30,652 28,369
Other assets 230 231
---------------------
$ 31,601 $ 30,067
=====================
Liabilities $ 305 $ 278
Stockholders' equity 31,296 29,789
---------------------
$ 31,601 $ 30,067
=====================
</TABLE>
<PAGE> 47
Statements of Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Revenues
Interest income from subsidiary bank $ 20 $ 31 $ 22
Dividend income from subsidiary bank 2,000 2,000 1,900
---------------------------
Total revenue 2,020 2,031 1,922
Operating expenses 20 31 22
---------------------------
Earnings before equity in undistributed earnings of
subsidiary bank 2,000 2,000 1,900
Equity in undistributed earnings of subsidiary bank 1,780 1,435 923
---------------------------
Net earnings $ 3,780 $ 3,435 $ 2,823
===========================
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,780 $ 3,435 $ 2,823
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiary bank (1,780) (1,435) (923)
(Increase) decrease in other assets 1 3 (4)
Increase (decrease) in other liabilities (7) (1) 13
Decrease in unearned compensation--ESOP 64 86
-----------------------------
Net cash provided by operating activities 1,994 2,066 1,995
-----------------------------
Cash flows from investing activities:
(Increase) decrease in interest bearing deposits with
subsidiary bank 748 (309) (332)
-----------------------------
Net cash provided by (used in) investing activities 748 (309) (332)
-----------------------------
Cash flows from financing activities:
Dividends paid on common stock (1,083) (998) (688)
Issuance of common stock in connection with exercise of
stock options 217
Purchase of treasury stock (1,876) (695) (889)
Payments made on long-term debt (64) (86)
-----------------------------
Net cash used in financing activities (2,742) (1,757) (1,663)
-----------------------------
Net increase (decrease) in cash 0 0 0
Cash at beginning of year 0 0 0
-----------------------------
Cash at end of year $ 0 $ 0 $ 0
=============================
</TABLE>
The Parent Company's Statements of Stockholders' Equity are
identical to the Consolidated Statements of Stockholders' Equity and
therefore, are not reprinted here.
The Company has no material contingencies, commitments or long-term
obligations other than those disclosed elsewhere in the accompanying Notes
to Consolidated Financial Statements.
<PAGE> 48
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the quarterly results of operations
for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996
----------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
($ In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income
Loans $ 4,712 $ 4,558 $ 4,365 $ 4,438
Securities available for sale 1,451 1,536 1,651 1,472
Securities held to maturity 139 129 124 2
Interest bearing deposits in Federal Home Loan
Bank of Boston 267 133 51 316
Federal Home Loan Bank of Boston stock 51 53 52 50
----------------------------------------
Total interest and dividend income 6,620 6,409 6,243 6,278
----------------------------------------
Interest expense
Deposits 2,774 2,670 2,558 2,634
Other borrowed funds 318 335 269 284
----------------------------------------
Total interest expense 3,092 3,005 2,827 2,918
----------------------------------------
Net interest and dividend income 3,528 3,404 3,416 3,360
Provision for possible loan losses 50 150 225 225
----------------------------------------
Net interest and dividend income after
provision for possible loan losses 3,478 3,254 3,191 3,135
Noninterest income <F1> 667 856 807 851
Noninterest expense 2,695 2,631 2,561 2,627
----------------------------------------
Earnings before income taxes 1,450 1,479 1,437 1,359
Income taxes 475 504 488 478
----------------------------------------
NET EARNINGS $ 975 $ 975 $ 949 $ 881
========================================
Net earnings per common share--primary $ 0.47 $ 0.46 $ 0.45 $ 0.41
Net earnings per common share--fully diluted <F2> $ 0.47 $ 0.46 $ 0.45 $ 0.41
Annualized Returns
Return on average assets 1.06% 1.09% 1.11% 1.03%
Return on average stockholders' equity 12.74% 13.00% 12.67% 11.43%
- ---------------------
<FN>
<F1> Included in noninterest income are net gains on sales of securities
available for sale of $212,000, $186,000, $100,000 and $189,000 in the
fourth quarter, third quarter, second quarter and first quarter,
respectively.
<F2> Earnings per common share is calculated by dividing net earnings by
the average common shares outstanding for each quarter. Therefore, the sum
of earnings per common share for the quarters may not equal total earnings
per share for the year.
</FN>
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
1995
----------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
($ In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income
Loans $ 4,622 $ 4,622 $ 4,668 $ 4,415
Securities available for sale 1,260 1,146 1,128 1,153
Securities held to maturity 124 199 210
Interest bearing deposits in Federal Home Loan
Bank of Boston 455 334 23 2
Federal Home Loan Bank of Boston stock 53 54 57 57
----------------------------------------
Total interest and dividend income 6,390 6,280 6,075 5,837
----------------------------------------
Interest expense
Deposits 2,700 2,597 2,367 1,814
Other borrowed funds 284 322 300 589
----------------------------------------
Total interest expense 2,984 2,919 2,667 2,403
----------------------------------------
Net interest and dividend income 3,406 3,361 3,408 3,434
Provision for possible loan losses 285 225 175 50
----------------------------------------
Net interest and dividend income after
provision for possible loan losses 3,121 3,136 3,233 3,384
Noninterest income <F1> 632 616 743 524
Noninterest expense 2,445 2,430 2,620 2,586
----------------------------------------
Earnings before income taxes 1,308 1,322 1,356 1,322
Income taxes 438 458 498 479
----------------------------------------
NET EARNINGS $ 870 $ 864 $ 858 $ 843
========================================
Net earnings per common share--primary $ 0.40 $ 0.40 $ 0.39 $ 0.39
Net earnings per common share--fully diluted <F2> $ 0.40 $ 0.40 $ 0.39 $ 0.39
Annualized Returns
Return on average assets 1.00% 1.02% 1.08% 1.10%
Return on average stockholders' equity 11.60% 11.91% 12.44% 13.09%
- --------------------
<FN>
<F1> Included in noninterest income are net gains on sales of securities
available for sale of $121,000, $0, $205,000 and $0 for the fourth
quarter, third quarter, second quarter and first quarter, respectively.
<F2> Earnings per common share is calculated by dividing net earnings by
the average common shares outstanding for each quarter. Therefore, the sum
of earnings per common share for the quarters may not equal total earnings
per share for the year.
</FN>
</TABLE>
<PAGE> 50
Consent of Independent Certified Public Accountants
We have issued our report dated January 9, 1997 accompanying the
consolidated financial statements incorporated by reference in the Annual
Report of Granite State Bankshares, Inc. and Subsidiary on Form 10-KSB for
the year ended December 31, 1996. We hereby consent to the incorporation by
reference of said report in the Registration Statement of Granite State
Bankshares, Inc. and Subsidiary on Form S-8 (File No. 33-57720, effective
February 1, 1993).
/s/ GRANT THORNTON LLP
Boston, Massachusetts
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,129
<INT-BEARING-DEPOSITS> 17,993
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99,423<F1>
<INVESTMENTS-CARRYING> 9,500
<INVESTMENTS-MARKET> 9,493
<LOANS> 204,479<F2>
<ALLOWANCE> 3,676
<TOTAL-ASSETS> 370,433
<DEPOSITS> 304,154
<SHORT-TERM> 31,535<F3>
<LIABILITIES-OTHER> 2,757
<LONG-TERM> 691
0
0
<COMMON> 2,579
<OTHER-SE> 28,717
<TOTAL-LIABILITIES-AND-EQUITY> 370,433
<INTEREST-LOAN> 18,073
<INTEREST-INVEST> 6,504
<INTEREST-OTHER> 973
<INTEREST-TOTAL> 25,550
<INTEREST-DEPOSIT> 10,636
<INTEREST-EXPENSE> 11,842
<INTEREST-INCOME-NET> 13,708
<LOAN-LOSSES> 650
<SECURITIES-GAINS> 687
<EXPENSE-OTHER> 10,514
<INCOME-PRETAX> 5,725
<INCOME-PRE-EXTRAORDINARY> 3,780
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,780
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 4.31
<LOANS-NON> 2,022
<LOANS-PAST> 93
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,704
<CHARGE-OFFS> 1,193
<RECOVERIES> 515
<ALLOWANCE-CLOSE> 3,676
<ALLOWANCE-DOMESTIC> 3,676
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Securities available for sale, at market value
<F2>Loans net of unearned income and gross of allowance for possible loan losses
Excludes loans held for sale
<F3>Securities sold under agreements to repurchase
</FN>
</TABLE>
