FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For quarterly period ended SEPTEMBER 30, 1997
Commission File No. 0-14895
GRANITE STATE BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 02-0399222
(State or other jurisdiction (I.R. S. Employer Identification No.)
of incorporation or organization)
122 WEST STREET, KEENE, NEW HAMPSHIRE 03431
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (603) 352-1600
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 ( )
The number of shares outstanding of each of the issuer's classes
of common stock, as of November 12, 1997, was 5,561,343, $1.00 par
value per share.
<PAGE> 1
INDEX
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
Part I Financial Information Page
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Earnings
Three and Nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Stockholders' Equity
Three and Nine months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows
Three and Nine months ended September 30, 1997 and 1996 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE> 2
<TABLE>
<CAPTION>
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
($ in thousands, except par values) 1997 1996
------------- ------------
<S> <C> <C>
(Unaudited)
ASSETS
Cash and due from banks $ 21,064 $ 18,129
Interest bearing deposits - Federal Home
Loan Bank of Boston 13,781 17,993
Securities held to maturity
(Market value $12,509 at September 30, 1997
and $9,493 at December 31, 1996) 12,500 9,500
Securities available for sale, at market value 99,169 99,423
Stock in Federal Home Loan Bank of Boston 3,215 3,215
Loans held for sale 506 1,025
Loans 249,310 206,339
Less: Unearned income (1,705) (1,860)
Allowance for possible loan losses (3,820) (3,676)
--------- ---------
Net Loans 243,785 200,803
Premises and equipment 10,514 10,783
Other real estate owned 1,013 1,512
Other assets 8,620 8,050
--------- ---------
$ 414,167 $ 370,433
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 298,933 $ 272,350
Noninterest-bearing deposits 36,089 31,804
-------- --------
Total Deposits 335,022 304,154
Securities sold under agreements to
repurchase 27,839 31,535
Short-term borrowings 10,000
Long-term debt 660 691
Other liabilities 4,337 2,757
-------- --------
Total Liabilities 377,858 339,137
Common stock, $1.00 par value; authorized
12,500,000 shares; issued 3,961,372* and
2,579,133 shares, respectively 3,961* 2,579
Additional paid-in capital 18,553* 19,518
-------- --------
22,514 22,097
Unrealized gain on securities available for
sale, net of related tax effects 3,891 2,006
Retained earnings 16,208 13,193
-------- --------
42,613 37,296
Less: Treasury stock, at cost, 920,185* and
600,080 shares, respectively (6,304) (6,000)
-------- --------
Total Stockholders' Equity 36,309 31,296
-------- --------
$ 414,167 $ 370,433
========= ========
*Adjusted to reflect the three-for-two stock split declared April 14, 1997
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
($ in thousands, except per share data) 1997 1996 1997 1996
--------- ------- -------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans $ 5,476 $ 4,558 $ 15,156 $ 13,361
Interest on securities held to maturity 216 129 706 255
Interest on securities available for sale 1,353 1,430 4,056 4,353
Dividends on Federal Home Loan Bank of
Boston stock 52 53 155 155
Dividends on equity securities available
for sale 117 106 403 306
Other interest 61 133 343 500
------ ------ ------- -------
7,275 6,409 20,819 18,930
Interest expense:
Savings deposits 1,240 1,185 3,654 3,464
Time deposits 1,865 1,485 5,268 4,398
Borrowed funds 391 335 1,003 888
------ ------- ------- -------
3,496 3,005 9,925 8,750
------ ------ ------- -------
Net interest and dividend income 3,779 3,404 10,894 10,180
Provision for possible loan losses 150 150 325 600
------ ------ ------- -------
Net interest and dividend income after
provision for possible loan losses 3,629 3,254 10,569 9,580
Noninterest income:
Mortgage service fees 156 173 481 511
Net gains on sales of securities available
for sale 103 186 2,149 475
Net gains on sales of loans 120 124 266 451
Other 338 373 965 1,077
------ ------ ------- -------
717 856 3,861 2,514
Noninterest expense:
Salaries and employee benefits 1,471 1,316 4,494 3,935
Occupancy and equipment 495 505 1,515 1,476
Other real estate owned 16 47 55 232
Other 671 763 2,046 2,176
------ ------ ------ -------
2,653 2,631 8,110 7,819
------ ------ ------ -------
Earnings before income taxes 1,693 1,479 6,320 4,275
Income taxes 587 504 2,296 1,470
------ ------ ------ ------
Net earnings $ 1,106 $ 975 $ 4,024 $ 2,805
====== ====== ====== ======
Weighted average common shares
outstanding:
Primary 3,131,242 3,145,758* 3,092,200* 3,181,761*
Fully diluted 3,134,832 3,147,058* 3,115,970* 3,185,334*
Net earnings per common share:
Primary $ 0.35 $ 0.31* $ 1.30* $ 0.88*
Fully diluted $ 0.35 $ 0.31* $ 1.29* $ 0.88*
*Adjusted to reflect the three-for-two stock split declared April 14, 1997
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands, except per share data) ------------------ -----------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Balance, beginning of period $ 34,203 $ 29,489 $ 31,296 $ 29,789
Net earnings 1,106 975 4,024 2,805
Dividends declared on common stock,
$0.11 per share and $0.33* per share,
respectively, for the three and nine
months ended September 30, 1997 and
$0.09* per share and $0.28* per share,
respectively, for the three and nine
months ended September 30, 1996 (335) (276) (1,012) (839)
Stock options exercised 43 310 36
Tax benefit associated with the exercise
of stock options 110
Purchase of treasury stock (451) (304) (1,208)
Increase (decrease) in net unrealized
gains on securities available for
sale, net of related tax effects 1,292 490 1,885 (356)
------- ------- ------- -------
Net change in stockholders' equity 2,106 738 5,013 438
------- ------- ------- -------
Balance, end of period $ 36,309 $ 30,227 $ 36,309 $ 30,227
======= ======= ======= =======
*Adjusted to reflect the three-for-two stock split declared April 14, 1997
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
Increase (decrease) in cash
(In Thousands) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Cash flows from operating
activities:
Net earnings $ 1,106 $ 975 $ 4,024 $ 2,805
Adjustments to reconcile net
earnings to net cash provided
by (used in) operating activities
Provision for possible loan losses 150 150 325 600
Provision for depreciation and
amortization 319 329 977 935
Net accretion on securities (25) (13) (57) (48)
Realized gains on sales of securities
available for sale (103) (186) (2,149) (475)
Loans originated for sale (6,698) (7,997) (18,585) (24,249)
Proceeds from sales of loans
originated for sale 7,081 6,860 19,370 24,569
Realized gains on sales of loans (120) (124) (266) (451)
Realization of unearned income (44) (47) (155) (112)
Provision for loss on other real
estate owned 15 101
Realized gains on sales of other
real estate owned (14) (53) (35) (80)
Deferred income tax expense
(benefit) (230) 203 (295) 67
(Increase) in other assets (388) (541) (805) (815)
Increase in other liabilities 152 51 507 195
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 1,186 (378) 2,856 3,042
Cash flows from investing activities:
Purchase of securities held to
maturity (6,000) (8,000)
Proceeds from maturities and calls
of securities held to maturity 3,000 3,000
Proceeds from sales of securities
available for sale 208 510 29,910 17,526
Proceeds from maturities and calls
of securities available for sale 7,499 19,000 31,499 31,000
Purchase of securities available
for sale (983) (1,386) (55,649) (46,884)
Loan originations, net of repayments (16,027) (4,389) (43,490) (9,655)
Purchase of premises and equipment (185) (249) (405) (1,557)
Proceeds from sales of other real
estate owned 144 508 872 1,949
Net (increase) decrease in interest-
bearing deposits with Federal Home
Loan Bank of Boston (13,749) (20,447) 4,212 3,791
Other (36) (67) (68) (256)
-------- -------- -------- --------
Net cash used in investing
activities (20,129) (6,520) (36,119) (12,086)
Cash flows from financing activities:
Net increase in time certificates
of deposit 6,781 3,989 19,331 3,779
Net increase (decrease) in demand,
NOW, regular savings and money
market deposit accounts (203) 2,378 11,537 8,879
Net increase (decrease) in securities
sold under agreements to repurchase 723 2,355 (3,696) (2,445)
Net increase (decrease) in short-term
borrowings 10,000 (4,704) 10,000
Payments of long-term borrowings (11) (10) (31) (28)
Proceeds from exercise of stock
options 43 310 36
Purchase of treasury stock (451) (304) (1,208)
Dividends paid on common stock (328) (280) (949) (807)
-------- -------- -------- --------
Net cash provided by financing
activities 17,005 3,277 36,198 8,206
-------- -------- -------- --------
Net increase (decrease) in cash
and due from banks (1,938) (3,621) 2,935 (838)
Cash and due from banks at
beginning of period 23,002 20,554 18,129 17,771
-------- -------- -------- --------
Cash and due from banks at
end of period $ 21,064 $ 16,933 $ 21,064 $16,933
========= ========= ========= ========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE> 6
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
Part I - Financial Information
Item 1. Financial Statements
Notes to Unaudited Consolidated Financial Statements
September 30, 1997
Note 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results that
may be expected for the current fiscal year. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1996.
Certain information in the 1996 financial statements has been
reclassified to conform with the 1997 presentation.
Note 2. SECURITIES
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 related tax effects. At September 30, 1997
and December 31, 1996, the Company had no securities classified as
trading securities.
The amortized cost, estimated market value and carrying value of
securities at September 30, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Amortized Estimated Carrying
At SEPTEMBER 30, 1997 Cost Market Value Value
--------- ------------ --------
(In Thousands)
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY
US Government agency obligations $ 12,500 $ 12,509 $ 12,500
-------- -------- --------
Total securities held to maturity $ 12,500 $ 12,509 $ 12,500
======== ======== ========
SECURITIES AVAILABLE FOR SALE
US Treasury obligations $ 40,356 $ 40,681 $ 40,681
US Government agency obligations 40,235 40,241 40,241
Other corporate obligations 1,983 1,993 1,993
Mutual Fund 5,482 5,515 5,515
Marketable equity securities 4,773 10,739 10,739
-------- -------- --------
Total securities available for sale $ 92,829 $ 99,169 $ 99,169
======== ======== ========
<PAGE> 7
<CAPTION>
Amortized Estimated Carrying
At DECEMBER 31, 1996 Cost Market Value Value
--------- ------------ --------
(In Thousands)
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY
US Government agency obligations $ 9,500 $ 9,493 $ 9,500
-------- -------- --------
Total securities held to maturity $ 9,500 $ 9,493 $ 9,500
======== ======== ========
SECURITES AVAILABLE FOR SALE
US Treasury obligations $ 25,847 $ 25,852 $ 25,852
US Government agency obligations 52,749 52,558 52,558
Other corporate obligations 5,476 5,449 5,449
Mutual Fund 5,239 5,244 5,244
Marketable equity securities 7,073 10,320 10,320
-------- -------- --------
Total securities available for sale $ 96,384 $ 99,423 $ 99,423
======== ======== ========
</TABLE>
Note 3. LOANS
Loans consist of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 9,808 $ 9,849
Real estate-residential 157,013 122,561
Real estate-commercial 64,028 58,302
Real estate-construction and
land development 2,919 3,030
Installment 4,448 4,488
Other 11,094 8,109
-------- --------
Total loans 249,310 206,339
Less:
Unearned income (1,705) (1,860)
Allowance for possible loan losses (3,820) (3,676)
-------- ---------
Net loans $ 243,785 $ 200,803
======== =========
</TABLE>
Real estate mortgage loans and other loans are stated at the
amount of unpaid principal, less unearned income and the allowance for
possible loan losses.
Interest on loans is accrued and credited to operations based upon
the principal amount outstanding. When management determines that
significant doubt exists as to collectibility of principal or interest
on a loan, the loan is placed on nonaccrual status. In addition, loans
past due 90 days or more as to principal or interest are placed on
nonaccrual status, except those loans which, in management's judgment,
are fully secured and in the process of collection. Interest accrued
but not received on loans placed on nonaccrual status is reversed and
charged against current operations. 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.
Loans considered to be uncollectible are charged against the
allowance for possible loan losses. The allowance is increased by
charges to current operations in amounts sufficient to maintain the
adequacy of the allowance. The adequacy of the allowance is determined
by management's evaluation of the extent of existing risks in the loan
portfolio and prevailing economic conditions.
<PAGE> 8
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 3,834 $ 3,701 $ 3,676 $ 3,704
Provision for possible loan losses 150 150 325 600
Loans charged off (192) (117) (242) (940)
Recoveries of loans previously
charged off 28 108 61 478
------ ------- ------ ------
Balance, end of period $ 3,820 $ 3,842 $ 3,820 $ 3,842
====== ====== ====== ======
</TABLE>
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures". 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.
The following presents information on impaired loans at or for the
three and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----- -----
(In Thousands)
<S> <C> <C>
Recorded investment in impaired loans $ 882 $ 917
===== =====
Average year-to-date recorded investment
in impaired loans $ 808 $ 569
===== =====
Impaired loans with specific loss allowances $ 882 $ 917
===== =====
Loss allowances reserved on impaired loans $ 195 $ 323
===== =====
Income recognized on impaired loans during
the three months ended September 30 $ 0 $ 0
===== =====
Income recognized on impaired loans during
the nine months ended September 30 $ 0 $ 4
===== =====
</TABLE>
The Company's policy for interest income recognition on impaired
loans is to recognize income on impaired loans on 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.
<PAGE> 9
Note 4. INTEREST BEARING DEPOSITS
Interest bearing deposits consist of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(In Thousands)
<S> <C> <C>
NOW and Super NOW accounts $ 116,211 $ 108,941
Savings accounts 36,165 36,217
Money market deposit accounts 11,629 11,595
Time certificates 134,928 115,597
---------- ---------
$ 298,933 $ 272,350
========== =========
</TABLE>
Note 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1997 1996 1997 1996
-------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Cash paid for interest $ 3,478 $ 3,191 $ 9,885 $ 8,764
Income taxes paid 815 200 2,015 1,300
Non-cash investing activities:
Real estate acquired
in settlement of loans 67 148 338 930
</TABLE>
Note 6. STOCK SPLIT
On April 14, 1997, the Board of Directors of the Company declared
a three-for-two stock split, effected in the form of a 50% stock
dividend, payable on May 9, 1997, to stockholders of record on April
25, 1997. The par value of the common stock was not changed as a result
of the split, therefore the par value of the additional shares was
transferred from additional paid in capital to common stock. All share
and per share information have been restated to reflect this stock
split.
<PAGE> 10
Note 7. ACQUISITION
On April 29, 1997, the Company and its wholly-owned subsidiary,
Granite Bank, entered into an Agreement and Plan of Reorganization (the
"Agreement") with Primary Bank pursuant to which Primary Bank will be
merged with and into Granite Bank (the "Merger"). As of September 30,
1997, Primary Bank had total assets of approximately $390 million. The
Merger was completed at the close of business on October 31, 1997. At
that time, each share of Primary Bank common stock converted into 1.1483
shares of the common stock of the Company, based on the exchange ratio
as set forth in the Agreement, resulting in the Company issuing
2,520,156 shares of common stock in exchange for Primary Bank common
stock. For further information, refer to Item 5 of this Form 10-Q.
The following unaudited pro forma combined condensed statements give
effect to the acquisition under the pooling-of-interests method of
accounting, but do not reflect anticipated merger expenses and
nonrecurring charges (which management estimates will be $6,000,000 on a
pretax basis and $4,400,000 net of tax benefits of $1,600,000) or
estimated expense savings and revenue enhancements anticipated as a
result of the acquisition.
<TABLE>
<CAPTION>
Pro Forma Combined Condensed Statement of Financial Condition
September 30, 1997
($ in thousands, except per share data)
Primary Pro Forma Pro Forma
Company Bank Adjustment Company
ASSETS ------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Securities held to maturity $ 12,500 $ 45,074 $ 57,574
Securities available for sale,
at market value 99,169 46,914 146,083
Mortgage -backed securities
held to maturity 14,079 14,079
Net loans 243,785 242,714 486,499
Other assets 58,713 41,152 99,865
------- ------- -------- -------
Total Assets $ 414,167 $ 389,933 $ 804,100
======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 335,022 $ 309,564 $ 644,586
Securities sold under
agreements to repurchase 27,839 31,104 58,943
Borrowed funds 10,660 15,504 26,164
Other liabilities 4,337 2,918 7,255
------- ------- -------
Total Liabilities 377,858 359,090 736,948
STOCKHOLDERS' EQUITY 36,309 30,843 67,152
------- ------- -------
Total Liabilities and
Stockholders' Equity $ 414,167 $ 389,933 $ 804,100
======= ======= =======
Common shares outstanding 3,041,187 <F1>2,414,340 5,455,527
Pro forma common stockholders'
equity per share $ 11.94 $ 12.31
======= =======
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
Pro Forma Combined Condensed Statements of Earnings
($ in thousands, except per share data)
Primary Pro Forma Pro Forma
Company Bank Adjustment Company
FOR THE THREE MONTHS ENDED ------- ------- ---------- ---------
SEPTEMBER 30, 1997
<S> <C> <C> <C> <C>
Interest income on loans $ 5,476 $ 5,430 $ 10,906
Interest and dividend income
on securities 1,738 2,088 3,826
Other interest income 61 101 162
------- ------- ------- -------
Total interest and dividend
income 7,275 7,619 14,894
Interest expense on deposits 3,105 2,813 5,918
Interest expense on borrowed funds 391 959 1,350
------- ------- ------- -------
Total interest expense 3,496 3,772 7,268
------- ------- ------- -------
Net interest and dividend income 3,779 3,847 7,626
Provision for possible loan losses 150 550 700
------- ------- ------- -------
Net int. and div. income after
loan loss provision 3,629 3,297 6,926
Net gains on sales of securities
available for sale 103 12 115
Other noninterest income 614 771 1,385
Noninterest expense 2,653 3,510 6,163
------- ------- ------- --------
Earnings before income taxes 1,693 570 2,263
Income taxes 587 587
------- ------- ------- --------
Net earnings $ 1,106 $ 570 $ 1,676
======= ======= ======= =======
Weighted average common shares:
-Primary 3,131,242 <F1>2,633,270 5,764,512
-Fully diluted 3,134,832 <F1>2,637,409 5,772,241
Net earnings per common share:
-Primary $ 0.35 $ 0.29
======== ========
-Fully diluted $ 0.35 $ 0.29
======== ========
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
<S> <C> <C> <C> <C>
Interest income on loans $ 15,156 $ 15,894 $ 31,050
Interest and dividend income
on securities 5,320 7,275 12,595
Other interest income 343 136 479
------- ------- ------- -------
Total interest and dividend
income 20,819 23,305 44,124
Interest expense on deposits 8,922 8,362 17,284
Interest expense on borrowed funds 1,003 3,565 4,568
------- ------- ------- -------
Total interest expense 9,925 11,927 21,852
------- ------- ------- -------
Net interest and dividend income 10,894 11,378 22,272
Provision for possible loan losses 325 1,300 1,625
------- ------- ------- -------
Net int. and div. income after
loan loss provision 10,569 10,078 20,647
Net gains on sales of securities
available for sale 2,149 39 2,188
Other noninterest income 1,712 2,175 3,887
Noninterest expense 8,110 10,983 19,093
------- ------- ------- -------
Earnings before income taxes 6,320 1,309 7,629
Income taxes 2,296 2,296
------- ------- ------- -------
Net earnings $ 4,024 $ 1,309 $ 5,333
======= ======= ======= =======
Weighted average common shares:
-Primary 3,092,200 <F1>2,595,808 5,688,008
-Fully diluted 3,115,970 <F1>2,631,182 5,747,152
Net earnings per common share:
-Primary $ 1.30 $ 0.94
======== =========
-Fully diluted $ 1.29 $ 0.93
======== =========
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
Pro Forma Combined Condensed Statements of Earnings
($ in thousands, except per share data)
Primary Pro Forma Pro Forma
FOR THE THREE MONTHS ENDED Company Bank Adjustment Company
SEPTEMBER 30, 1996 ------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Interest income on loans $ 4,558 $ 4,918 $ 9,476
Interest and dividend income
on securities 1,718 2,318 4,036
Other interest income 133 33 166
------- ------- ------- -------
Total interest and dividend
income 6,409 7,269 13,678
Interest expense on deposits 2,670 2,835 5,505
Interest expense on borrowed funds 335 1,067 1,402
------- ------- ------- -------
Total interest expense 3,005 3,902 6,907
------- ------- ------- -------
Net interest and dividend income 3,404 3,367 6,771
Provision for possible loan losses 150 390 540
------- ------- ------- -------
Net int. and div. income after
loan loss provision 3,254 2,977 6,231
Net gains on sales of securities
available for sale 186 3 189
Other noninterest income 670 652 1,322
Noninterest expense 2,631 2,897 5,528
------ ------ ------- -------
Earnings before income taxes 1,479 735 2,214
Income taxes (benefit) 504 (100) 404
------ ------- ------- -------
Net earnings $ 975 $ 835 $ 1,810
======= ======= ======= =======
Weighted average common shares:
-Primary 3,145,758 <F1>2,389,587 5,535,345
-Fully diluted 3,147,058 <F1>2,397,564 5,544,622
Net earnings per common share:
-Primary $ 0.31 $ 0.33
======= =======
-Fully diluted $ 0.31 $ 0.33
======= =======
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
<S> <C> <C> <C> <C>
Interest income on loans $ 13,361 $ 14,691 $ 28,052
Interest and dividend income
on securities 5,069 6,506 11,575
Other interest income 500 78 578
------- ------- -------
Total interest and dividend
income 18,930 21,275 40,205
Interest expense on deposits 7,862 8,545 16,407
Interest expense on borrowed funds 888 2,887 3,775
------ ------- -------
Total interest expense 8,750 11,432 20,182
------ ------- -------
Net interest and dividend income 10,180 9,843 20,023
Provision for possible loan losses 600 686 1,286
------ ------- -------
Net int. and div. income after
loan loss provision 9,580 9,157 18,737
Net gains on sales of securities
available for sale 475 56 531
Other noninterest income 2,039 1,835 3,874
Noninterest expense 7,819 8,880 16,699
------ ------- -------
Earnings before income taxes 4,275 2,168 6,443
Income taxes (benefit) 1,470 (240) 1,230
------ ------- -------
Net earnings $ 2,805 $ 2,408 $ 5,213
====== ======= =======
Weighted average common shares:
-Primary 3,181,761 <F1>2,385,814 5,567,575
-Fully diluted 3,185,334 <F1>2,392,949 5,578,283
Net earnings per common share:
-Primary $ 0.88 $ 0.94
======= =======
-Fully diluted $ 0.88 $ 0.93
======= =======
<FN>
<F1> The pro forma financial statements reflect the exchange of Primary
Bank Common Stock for Granite State Bankshares, Inc. Common Stock in
connection with the Primary Bank acquisition at the exchange ratio of
1.1483.
</FN>
</TABLE>
<PAGE> 13
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
GENERAL
All information within this section should be read in conjunction
with the consolidated financial statements and notes included elsewhere
in this Form 10-Q. All references in the discussion to financial
condition and results of operations are to the consolidated financial
position of the Company and its subsidiary taken as a whole.
The principal business of the Company is to serve as a financial
intermediary attracting deposits from the general public and making both
secured and unsecured loans. The operating results of the Company
depend primarily on net interest income earned by the Company's
subsidiary, Granite Bank (the "subsidiary bank"). Net interest income
is the difference between interest and dividend income on interest
earning assets, primarily loans and securities, and interest expense on
interest bearing liabilities, which consist of deposits and borrowings.
Operating results of the Company also depend upon the provision for
possible loan losses, noninterest income, noninterest expense and income
tax expense.
On April 14, 1997, the Board of Directors of the Company declared
a three-for-two stock split, effected in the form of a 50% stock
dividend, payable on May 9, 1997, to stockholders of record on April
25, 1997. All share and per share information has been restated to
reflect this stock split.
On April 29, 1997, the Company and its wholly-owned subsidiary,
Granite Bank, entered into an Agreement and Plan of Reorganization (the
"Agreement") with Primary Bank pursuant to which Primary Bank will be
merged with and into Granite Bank (the "Merger"). As of September 30,
1997, Primary Bank had total assets of approximately $390 million. The
Merger was completed at the close of business on October 31, 1997. At
that time, each share of Primary Bank common stock converted into 1.1483
shares of the common stock of the Company, based on the exchange ratio
as set forth in the Agreement, resulting in the Company issuing
2,520,156 shares of common stock in exchange for Primary Bank common
stock. It is expected that the fourth quarter will be negatively
impacted by merger expenses and nonrecurring charges related to the
merger, which management estimates will be $6,000,000 on a pretax basis
and $4,400,000 after estimated tax benefits of $1,600,000. For further
information, refer to Note 7 of Notes to Unaudited Consolidated Financial
Statements and Item 5 of this Form 10-Q.
FINANCIAL CONDITION
Total assets increased by $43,734,000 or 11.81%, from $370,433,000
at December 31, 1996, to $414,167,000 at September 30, 1997.
Cash and due from banks increased by $2,935,000 from $18,129,000
at December 31, 1996 to $21,064,000 at September 30, 1997. The increase
was funded with proceeds from decreases in interest bearing deposits
with the Federal Home Loan Bank of Boston.
Interest bearing deposits with the Federal Home Loan Bank of
Boston decreased $4,212,000, from $17,993,000 at December 31, 1996 to
$13,781,000 at September 30, 1997. Such investments are short-term
overnight deposits and the level of the Company's investment in these
instruments fluctuates as investments are made in other interest earning
assets such as loans, securities held to maturity and
<PAGE> 14
securities available for sale and as balances of interest bearing
liabilities such as deposits, securities sold under agreement to repurchase
and short-term borrowings fluctuate. These instruments are also used to fund
cash and due from bank requirements.
Securities held to maturity increased $3,000,000, from $9,500,000
at December 31, 1996 to $12,500,000 at September 30, 1997, as proceeds
from decreases in interest bearing deposits with the Federal Home Loan
Bank of Boston were invested in higher yielding instruments.
Securities available for sale decreased $254,000, from $99,423,000
at December 31, 1996 to $99,169,000 at September 30, 1997. The decrease
in securities available for sale is net of a noncash increase in the net
unrealized gains on securities available for sale of $3,300,000.
Net loans were $243,785,000 at September 30, 1997, an increase of
$42,982,000 from $200,803,000 at December 31, 1996. The increase
reflects strong loan demand in the residential real estate sector of
the market, including multi-family real estate. Since July 1, 1996, the
subsidiary bank has been originating fifteen year fixed rate residential
real estate loans for its loan portfolio. Such loans had previously been
sold into the secondary mortgage market. Loan growth was funded
primarily by an increase in deposits and proceeds from decreases in
interest bearing deposits with the Federal Home Loan Bank of Boston.
Total deposits increased $30,868,000, from $304,154,000 at
December 31, 1996 to $335,022,000 at September 30, 1997. The increases
primarily came from increases in NOW and Super NOW accounts of
$7,270,000, increases in time certificates of $19,331,000 and increases
in noninterest bearing deposits of $4,285,000. Such increases are the
result of the continued success of one of the subsidiary bank's NOW
account products and the competitive rates offered by the subsidiary
bank on certain time certificates. The increase in deposits was used to
fund loan growth.
Securities sold under agreements to repurchase decreased
$3,696,000, from $31,535,000 at December 31, 1996 to $27,839,000 at
September 30, 1997. The decrease was funded by a decrease in interest
bearing deposits with the Federal Home Loan Bank of Boston.
Short-term borrowings were from the Federal Home Loan Bank of
Boston and increased $10,000,000 to $10,000,000 at September 30, 1997
from $0 at December 31, 1996. Such borrowings were invested in interest
bearing deposits with the Federal Home Loan Bank of Boston which were
then used to fund other interest earning assets, interest bearing
liabilities and cash and due from bank requirements.
Stockholders' equity increased by $5,013,000 during the first nine
months of 1997, from $31,296,000 at December 31, 1996, to $36,309,000 at
September 30, 1997. The increase was due to $4,024,000 of net earnings,
$310,000 relating to the issuance of common stock upon the exercise of
common stock options, a tax benefit of $110,000 associated with the
exercise of the options and an increase of $1,885,000 in unrealized
gains on securities available for sale, net of related tax effects,
partially offset by $1,012,000 of common stock dividends declared, and
$304,000 in repurchases of treasury stock.
Stock Repurchase Plan
On August 13, 1996, the Company announced a 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. The Company had
repurchased 72,549 shares under the Program, representing 2.44% of
common shares outstanding at August 13, 1996. There were no shares
repurchased under the Program during the quarters ended June 30, 1997
and September 30, 1997, and, as a result of the Agreement and Plan of
Reorganization entered into with Primary Bank on April 29, 1997 (see
Note 7 of Notes to Unaudited Consolidated Financial Statements and Item
5 of this Form 10-Q), the Stock Repurchase Program has been terminated.
<PAGE> 15
RESULTS OF OPERATIONS
Net Earnings
Net earnings for the three and nine months ended September 30,
1997 were $1,106,000 and $4,024,000, compared to $975,000 and $2,805,000
for the three and nine months ended September 30, 1996. Net earnings
for the three and nine months ended September 30, 1997, increased 13.44%
and 43.46%, respectively, over net earnings for the three and nine
months ended September 30, 1996. Earnings per common share for the
three and nine months ended September 30, 1997 were $0.35 and $1.30
($1.29 fully diluted), compared to $0.31 and $0.88 for the three and
nine months ended September 30, 1996. The increase in net earnings for
the three months ended September 30, 1997, compared to the three months
ended September 30, 1996, was primarily due to an increase in net
interest income of $375,000 partially offset by a decrease in
noninterest income of $139,000 and an increase in noninterest expense of
$22,000. The increase in net earnings for the nine months ended
September 30, 1997, compared to net earnings for the nine months ended
September 30, 1996, was primarily due to an increase in net interest
income of $714,000, an increase in noninterest income of $1,347,000 and
a decrease in the provision for possible loan losses of $275,000,
partially offset by an increase in noninterest expense of $291,000.
Interest and Dividend Income
Interest and dividend income for three and nine months ended
September 30, 1997 was $7,275,000 and $20,819,000, compared to
$6,409,000 and $18,930,000 for the corresponding periods in 1996.
Average interest earning assets for the three and nine months ended
September 30, 1997 were $357,251,000 and $345,740,000, respectively,
and for the three and nine months ended September 30, 1996 were
$320,025,000 and $314,319,000, respectively. The yield on interest
earning assets was 8.08% and 8.05%, respectively, for the three and nine
months ended September 30, 1997, compared to 7.97% and 8.05%,
respectively, for the same periods in 1996.
The increase in interest and dividend income for the three and
nine months ended September 30, 1997 compared to the three and nine
months ended September 30, 1996 is primarily attributable to an increase
in average interest earning assets for the three and nine months ended
September 30, 1997 compared to the same periods in 1996.
Interest Expense
Interest expense for the three and nine months ended September 30,
1997 was $3,496,000 and $9,925,000, compared to $3,005,000 and
$8,750,000 for the corresponding periods in 1996. Average interest
bearing liabilities for the three and nine months ended September 30,
1997 were $325,713,000 and $315,801,000, respectively, and for the three
and nine months ended September 30, 1996 were $292,369,000 and
$286,372,000, respectively. The rates paid on interest bearing
liabilities were 4.26% and 4.20%, respectively, for the three and nine
months ended September 30, 1997, compared to 4.09% and 4.08%,
respectively, for the same periods in 1996.
The increase in interest expense for the three and nine months
ended September 30, 1997 compared to the same periods in 1996 is
primarily due to an increase in the average balance of interest bearing
liabilities coupled with an increase in the interest rates paid on these
liabilities for the three and nine months ended September 30, 1997
compared to the same periods in 1996.
<PAGE> 16
Net Interest Income
Net interest income increased by $375,000 for the three months
ended September 30, 1997 compared to the same period in 1996 and
increased by $714,000 for the nine months ended September 30, 1997
compared to the same period in 1996. The increase for the three and
nine months ended September 30, 1997 compared to the same periods in
1996 relates to an increase in interest earning assets, partially offset
by reductions in the interest rate spread and the net yield on interest
earning assets, as the rates paid for interest bearing liabilities
increased for the three and nine months ended September 30, 1997
compared to the same periods in 1996, while the yields realized on
interest earning assets decreased for the three months ended September
30, 1997 compared to the three months ended September 30, 1996 and were
stable for the nine months ended September 30, 1997 compared to the same
period in 1996. The Company's interest rate spread was 3.82% and 3.85%, for
the three and nine months ended September 30, 1997, compared to 3.88% and
3.96% for the three and nine months ended September 30, 1996. The net yield
on interest earning assets for the three and nine months ended September 30,
1997 was 4.19% and 4.21%, compared to 4.23% and 4.33% for the three and nine
months ended September 30, 1996.
Provision for Possible Loan Losses
The provision for possible loan losses for the three and nine
months ended September 30, 1997 was $150,000 and $325,000, compared to
$150,000 and $600,000 for the three and nine months ended September 30,
1996. The decrease in the provision for the nine months ended September
30, 1997, compared to the same period in 1996, related primarily to a
decrease in net loan charge-offs for the nine months ended September 30,
1997 compared to the same period in 1996, as well as management's
evaluation of the adequacy of the level of the allowance in relation to
nonperforming loans and total loans.
Nonperforming loans totaled $2,198,000 at September 30, 1997, an
increase of $176,000 from $2,022,000 at December 31, 1996. The level of
net charge-offs (recoveries) for the three and nine months ended
September 30, 1997 was $164,000 and $181,000, compared to $9,000 and
$462,000, for the corresponding periods a year ago.
The adequacy of the allowance for possible loan losses is
evaluated by management on a quarterly basis. This review includes an
assessment of problem loans and potential unknown losses based on
current economic conditions, the regulatory environment and historical
experience. The provision for possible loan losses represents charges
to operations necessary to maintain the allowance at a level which
management believes will be adequate to absorb possible losses.
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.
Noninterest Income
Noninterest income for the three and nine months ended September
30, 1997 totaled $717,000 and $3,861,000, compared to $856,000 and
$2,514,000 for the same periods in 1996. The significant changes in the
components of noninterest income for the three and nine months ended
September 30, 1997 compared to the same periods in 1996 were primarily
net gains on sales of securities available for sale of $103,000 and
$2,149,000 for the three and nine months ended September 30, 1997,
compared to $186,000 and $475,000 for the three and nine months ended
September 30, 1996, and a decrease in net gains on sale of loans which
were $120,000 and $266,000 for the three and nine months ended September
30, 1997 compared to $124,000 and $451,000 for the same periods in 1996.
The $1,674,000 increase in net gains on sales of securities available
for sale for the nine months ended September 30, 1997 compared to the
same period in 1996 was primarily the result of the Company selling
certain of its equity investments
<PAGE> 17
available for sale during the first quarter of 1997, based on a perceived
volatility in the stock markets, as a result of significant increases in the
market values of stocks over the past few years. The decrease in net gains
on sales of loans for the nine months ended September 30, 1997 compared to
the same period in 1996, relates primarily to the decreased volume in the
sale of loans into the secondary mortgage market, as a result of the
subsidiary bank originating fifteen year fixed rate loans for portfolio that
were previously sold into the secondary mortgage market, as well as a
decrease in the volume of thirty year fixed rate loan originations that
are still being sold into the secondary mortgage market.
Noninterest Expense
Noninterest expense for the three and nine months ended September
30, 1997 totaled $2,653,000 and $8,110,000, compared to $2,631,000 and
$7,819,000 for the same periods a year earlier. The increase of $22,000
for the three months ended September 30, 1997, compared to 1996 relates
primarily to an increase of $155,000 associated with salaries and
benefit expenses, partially offset by a decrease of $10,000 in occupancy
and equipment expenses, a decrease of $31,000 in costs associated with
the holding and disposition of other real estate owned and a decrease in
other noninterest expenses of $92,000. The increase of $291,000 for the
nine months ended September 30, 1997, compared to 1996 relates primarily
to, an increase of $559,000 associated with salaries and benefit
expenses and an increase of $39,000 in occupancy and equipment expenses,
partially offset by a decrease of $177,000 in costs associated with the
holding and disposition of other real estate owned and a decrease of
$130,000 in other noninterest expenses. The decrease in other
noninterest expenses for the three months ended September 30, 1997
compared to the same period in 1996 related primarily to a decrease in
deposit insurance premiums paid to the Federal Deposit Insurance
Corporation ("FDIC") of $197,000, partially offset by an increase in
advertising expense of $62,000. The decrease in other noninterest
expense for the nine months ended September 30, 1997 compared to the
same period in 1996 related primarily to a decrease in deposit insurance
premiums paid to the FDIC of $232,000 partially offset by an increase in
advertising expense of $113,000. The decrease in FDIC deposit insurance
premiums for the three and nine months ended September 30, 1997 compared
to the same periods in 1996, related primarily to a special assessment
of $187,000 by the FDIC on the Company's Savings Association Insurance
Fund ("SAIF") assessable Oakar deposits, as a result of legislation
signed by the President of the United States on September 30, 1996 to
recapitalize the SAIF.
Income Taxes
Income taxes for the three and nine months ended September 30,
1997 were $587,000 and $2,296,000, compared with $504,000 and $1,470,000
for the same periods in 1996. The increase in income tax expense for
the three and nine months ended September 30, 1997 compared with the
same periods in 1996 related primarily to the increase in earnings
before income taxes and an increase in state income tax expense. Income
tax expense as a percentage of earnings before income taxes was 34.67%
and 36.33% for the three and nine months ended September 30, 1997,
compared with 34.08% and 34.39% for the same periods a year earlier.
Risk Elements
Total nonperforming loans increased from $2,022,000 or 0.98% of
total loans, at December 31, 1996, to $2,198,000 or 0.88% of total
loans, at September 30, 1997. During the same period, other real estate
owned, declined from $1,512,000 to $1,013,000. The allowance for
possible loan losses as a percent of total nonperforming loans was
173.79% at September 30, 1997, compared with 181.80% at December 31,
1996.
<PAGE> 18
As shown in the following table, nonperforming assets as a
percentage of total assets were 0.78% and 0.95%, as of September 30,
1997 and December 31, 1996, respectively.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
($ in Thousands)
<S> <C> <C>
Loans 90 days or more past due
and still accruing $ 262 $ 93
========= =========
Nonaccrual/nonperforming loans $ 2,198 $ 2,022
Other real estate owned 1,013 1,512
--------- ---------
Total nonperforming assets $ 3,211 $ 3,534
========= =========
Allowance for possible loan losses $ 3,820 $ 3,676
Nonperforming loans as a percent of
total loans 0.88% 0.98%
Allowance for possible loan losses
as a percent of total nonperforming
loans 173.79% 181.80%
Nonperforming assets as a percent of
total assets 0.78% 0.95%
</TABLE>
Liquidity
The Company's primary sources of liquidity, through its subsidiary
bank, are its borrowing capacity with the Federal Home Loan Bank of
Boston, interest bearing deposits with the Federal Home Loan Bank of
Boston and securities available for sale, particularly short-term
investments. At September 30, 1997, short-term and long-term borrowings
from the Federal Home Loan Bank of Boston were $10,660,000, with an
additional available borrowing capacity of approximately $179,478,000;
interest bearing deposits with the Federal Home Loan Bank of Boston were
$13,781,000 and securities available for sale were $99,169,000.
Included in securities held to maturity and securities available for
sale are debt securities with a carrying value of $95,415,000, all of
which have remaining maturities of less than five years and a weighted-
average maturity of approximately thirty two months. In addition to
these liquidity sources, the Company has significant cash flow from the
amortization of loans through its subsidiary bank.
Capital Resources
Under the Federal Reserve Board's guidelines, bank holding
companies such as the Company currently are required to maintain a
minimum ratio of qualifying total capital to total assets and off-
balance sheet instruments, as adjusted to reflect their relative credit
risks, of 8.0 percent. At least one-half of total capital must be
comprised of common equity, retained earnings, non-cumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred
stock, less goodwill ("Tier I capital").
The Federal Reserve Board also has established an additional
capital adequacy guideline referred to as the Tier I leverage capital
ratio, which measures the ratio of Tier I capital to total assets less
goodwill. Although the most highly-rated bank holding companies will be
required to maintain a minimum Tier I leverage capital ratio of 3.0
percent, most bank holding companies will be required to maintain Tier I
leverage capital ratios of 4.0 percent to 5.0 percent or more. The
actual required ratio will be based on the Federal Reserve Board's
assessment of the individual bank holding company's asset quality,
earnings
<PAGE> 19
performance, interest rate risk, and liquidity. The Company
was in compliance with all regulatory capital requirements at September
30, 1997 and December 31, 1996.
Substantially similar rules have been issued by the FDIC with
respect to state-chartered banks which are not members of the Federal
Reserve System such as the subsidiary bank. At September 30, 1997 and
December 31, 1996, the subsidiary bank was in compliance with all
regulatory capital requirements. Additionally, at September 30, 1997,
the subsidiary bank was considered "well capitalized" for purposes of
the FDIC's prompt corrective action regulations.
At September 30, 1997 the Company's and the subsidiary bank's
regulatory capital ratios as a percentage of assets are as follows:
<TABLE>
<CAPTION>
September 30, 1997
--------------------------
Subsidiary
Bank Company
---------- --------
<S> <C> <C>
Tier I leverage capital 7.05% 7.39%
Tier I capital to risk-weighted assets 12.29% 12.75%
Total capital to risk-weighted assets 13.42% 13.84%
</TABLE>
Consolidated Quarterly Average Balances and Interest Rates
The table on the following page presents, for the periods
indicated, average balances of assets and liabilities, as well as yields
on interest earning assets and the cost of interest bearing liabilities.
<PAGE> 20
<TABLE>
<CAPTION>
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED QUARTERLY AVERAGE BALANCES AND INTEREST RATES
(dollars in thousands)
1997 QTD 1996 QTD
---------------------------------------------------- -----------------
Third Quarter Second Quarter First Quarter Fourth Quarter
Avg. bal. Rate Avg. bal. Rate Avg. bal. Rate Avg. bal. Rate
--------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $ 240,177 9.05% $219,004 9.17% $ 205,810 9.23% $ 200,089 9.37%
Securities and
interest earning
investments 117,074 6.10% 126,423 6.16% 128,480 6.08% 128,462 5.91%
--------- ----- --------- ----- --------- ----- --------- -----
Total interest
earning assets 357,251 8.08% 345,427 8.07% 334,290 8.02% 328,551 8.02%
Noninterest earning
assets 42,038 39,971 39,482 39,690
Allowance for loan
losses (3,874) (3,755) (3,667) (3,849)
--------- --------- --------- ---------
Total Assets $ 395,415 $ 381,643 $ 370,105 $ 364,392
========= ========= ========= =========
Liabilities and
stockholders' equity:
Savings deposits $ 162,203 3.01% $ 162,011 3.04% $ 159,350 3.03% $ 159,587 3.06%
Time Deposits 130,920 5.68% 127,867 5.60% 118,938 5.53% 112,948 5.45%
Other borrowed funds 32,590 4.76% 24,795 4.61% 28,520 4.68% 27,606 4.58%
--------- ----- --------- ----- --------- ----- --------- -----
Total int. bearing
liabilities 325,713 4.26% 314,673 4.20% 306,808 4.15% 300,141 4.10%
Noninterest bearing
deposits 31,483 31,419 29,039 31,376
Other liabilities 3,430 2,743 2,190 2,420
Stockholders' equity 34,789 32,808 32,068 30,455
--------- --------- --------- ---------
Total liab. and stock-
holders' equity $ 395,415 $ 381,643 $ 370,105 $ 364,392
========= ========= ========= =========
Interest rate spread 3.82% 3.87% 3.87% 3.92%
===== ===== ===== =====
Net average earning
balance / Net yield on
interest earning assets $ 31,538 4.19% $ 30,754 4.24% $ 27,482 4.20% $ 28,410 4.27%
========= ===== ========= ===== ======== ===== ======== =====
<CAPTION>
1996 QTD 1995 QTD
---------------------------------------------------- ----------------
Third Quarter Second Quarter First Quarter Fourth Quarter
Avg. bal. Rate Avg. bal. Rate Avg. bal. Rate Avg. bal. Rate
--------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $ 195,834 9.26% $ 187,531 9.36% $ 188,026 9.49% $ 188,881 9.79%
Securities and
interest earning
investments 124,191 5.93% 123,577 6.11% 123,735 5.98% 122,756 5.76%
--------- ----- --------- ----- --------- ----- --------- -----
Total interest
earning assets 320,025 7.97% 311,108 8.07% 311,761 8.10% 311,637 8.20%
Noninterest earning
assets 38,101 37,090 36,913 36,036
Allowance for loan
losses (3,715) (3,708) (3,733) (3,602)
--------- --------- --------- ---------
Total Assets $ 354,411 $ 344,490 $ 344,941 $ 344,071
========= ========= ========= =========
Liabilities and
stockholders' equity:
Savings deposits $ 157,093 3.00% $ 155,830 2.93% $ 153,937 2.99% $ 151,261 3.13%
Time Deposits 106,790 5.53% 105,344 5.44% 105,626 5.67% 105,370 5.75%
Other borrowed funds 28,486 4.68% 21,745 4.98% 24,198 4.72% 23,425 4.85%
--------- ----- --------- ----- --------- ----- --------- -----
Total int. bearing
liabilities 292,369 4.09% 282,919 4.02% 283,761 4.14% 280,056 4.26%
Noninterest bearing
deposits 30,303 29,410 27,953 30,139
Other liabilities 1,905 2,089 2,240 4,113
Stockholders' equity 29,834 30,072 30,987 29,763
--------- --------- --------- ---------
Total liab. and
stockholders' equity $ 354,411 $ 344,490 $ 344,941 $ 344,071
========= ========= ========= =========
Interest rate spread 3.88% 4.05% 3.96% 3.94%
===== ===== ===== =====
Net average earning
balance / Net yield on
interest earning assets $ 27,656 4.23% $ 28,189 4.42% $ 28,000 4.33% $ 31,581 4.34%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
<PAGE> 21
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
Part II - Other Information
September 30, 1997
Item 1. 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.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On September 23, 1997, the Company held a Special Meeting of
Stockholders. The matters which were submitted to a vote of the
security holders and the results of the voting at such meeting were as
follows.
<TABLE>
<CAPTION>
Results of Stockholder Vote
----------------------------------
Abstentions
and Broker
Matter Submitted For Against Non-Votes
----------------- --------- ------- -----------
<S> <C> <C> <C>
1) The approval of the Agreement and Plan
of Reorganization as amended, dated as
of April 29, 1997, among Granite State
and its wholly owned subsidiary, Granite
Bank and Primary Bank, a New Hampshire
chartered guaranty (stock) savings bank,
and a related Agreement and Plan of
Merger as amended between Primary Bank
and Granite Bank and joined in by
Granite State. 2,341,614 3,308 5,990
</TABLE>
Item 5. Other Information
On April 29, 1997, the Company and its wholly-owned subsidiary,
Granite Bank, entered into an Agreement and Plan of Reorganization (the
"Agreement") with Primary Bank pursuant to which Primary Bank will be
merged with and into Granite Bank (the "Merger"). As of September 30,
1997, Primary Bank had total assets of approximately $390 million. The
Merger was completed at the close of business on October 31, 1997. At
that time, each share of Primary Bank common stock converted into 1.1483
shares of the common stock of the Company, based on the exchange ratio
as set forth in the Agreement, resulting in the Company issuing
2,520,156 shares of common stock in exchange for Primary Bank common
stock. For further information, refer to Note 7 of Notes to Unaudited
Consolidated Financial Statements and Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - General
of this Form 10-Q.
The financial statements of Primary Bank that were included with
the Company's proxy statement dated August 8, 1997 are incorporated
herein by reference thereto. Primary Bank's quarterly report on Form F-
4 as filed with the FDIC for the quarter ended June 30, 1997 is included
as Exhibit 3 to this Form 10-Q.
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
3 Primary Bank Quarterly Report on Form F-4 as
filed with the FDIC For the Quarter Ended June 30,1997.
27 Financial Data Schedule
2. Reports on Form 8-K
A report on Form 8-K was filed on August 13, 1997 for the
purpose of reporting, pursuant to Item 5 thereof, the
termination of the Company's stock repurchase program.
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant, has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GRANITE STATE BANKSHARES, INC.
/s/ Charles W. Smith
------------------------------------
Dated : November 13, 1997 By: Charles W. Smith
Chairman and
Chief Executive Officer
/s/ William G. Pike
------------------------------------
Dated : November 13, 1997 By: William G. Pike
Executive Vice President and
Chief Financial Officer
<PAGE> 24
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997
7745
-----------------------------------
(FDIC Insurance Certificate Number)
PRIMARY BANK
------------------------------------------------
(Exact name of Bank as specified in its Charter)
NEW HAMPSHIRE
------------------------
(State of Incorporation)
02-0178110
---------------------------------------
(I.R.S. Employer Identification Number)
35 MAIN STREET, PETERBOROUGH, NH
----------------------------------------
(Address of Principal Executive Offices)
03458
----------
(Zip Code)
(603) 924-7142
----------------------------------------------
(Bank's Telephone Number, including area code)
Indicate by check mark whether the Bank (1) has filed all reports required
to be filed by section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Bank was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of each of the Bank's classes of common
stock as of the latest practicable date is as follows:
Class: Common Stock, par value $.01 per share
Outstanding as of July 31, 1997: 2,094,661 shares
<PAGE>
CONTENTS
ITEM 1. - FINANCIAL STATEMENTS
BALANCE SHEETS
June 30, 1997 and December 31, 1996 1
STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997 and 1996 2
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three and Six Months Ended June 30, 1997 and 1996 3
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996 4 - 5
NOTES TO FINANCIAL STATEMENTS 6 - 12
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13 - 15
OTHER INFORMATION 16 - 22
<PAGE>
PRIMARY BANK
Balance Sheets
(Dollars in Thousands) Except Per Share Data
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
Assets (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 21,169 $ 12,430
Securities available for sale (note 2) 68,925 83,039
Investment securities held to maturity (note 3) 50,525 59,643
Mortgage-backed securities held to maturity (note 4) 14,619 15,681
Loans (note 5) 248,094 235,537
Less allowance for loan losses (2,683) (2,577)
------------------------
Net loans 245,411 232,960
------------------------
Banking premises and equipment 9,736 8,815
Other real estate owned, net (note 6) 1,480 1,980
Accrued income receivable 3,199 3,355
Stock in the FHLB of Boston, at cost 3,986 3,150
Other assets 10,706 4,313
Deferred income tax asset, net (note 10) 1,927 2,041
------------------------
Total assets $431,683 $427,407
========================
Liabilities and Stockholders' Equity
Deposits (note 7) $311,571 $305,090
Customer repurchase agreements 28,001 33,426
Borrowed funds (note 8) 59,867 58,499
Advance payments by borrowers for taxes 494 423
Accrued interest payable 728 708
Other liabilities 1,086 1,128
------------------------
Total liabilities 401,747 399,274
------------------------
Stockholders' Equity
Common Stock (par value $.01 per share,
2,088,567 shares outstanding) 21 21
Additional paid-in capital 16,981 16,161
Retained earnings 13,250 12,511
Less: Unearned Compensation - ESOP (143) (143)
------------------------
30,109 28,550
Unrealized loss on securities available for sale,
after tax effects (note 2) (173) (417)
------------------------
Total Stockholders' Equity 29,936 28,133
------------------------
Total Liabilities and Stockholders' Equity $431,683 $427,407
========================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 1
PRIMARY BANK
Statements of Operations (Unaudited)
(Dollars in Thousands) Except Per Share Data
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Mortgage loans $ 3,407 $ 3,052 $ 6,697 $ 6,066
Other loans 1,944 1,727 3,767 3,707
Mortgage-backed securities 255 197 514 411
Investment securities and securities available for sale 2,361 2,019 4,673 3,777
Interest bearing deposits in other banks 29 25 35 45
------------------------------------------------
Total interest and dividend income 7,996 7,020 15,686 14,006
------------------------------------------------
Interest Expense:
Deposits 2,785 2,841 5,549 5,710
Repurchase agreements 339 252 714 528
Borrowed funds 1,000 713 1,892 1,292
------------------------------------------------
Total interest expense 4,124 3,806 8,155 7,530
------------------------------------------------
Net interest and dividend income 3,872 3,214 7,531 6,476
Provision for loan losses 600 242 750 296
------------------------------------------------
Net interest and dividend income after provision for loan losses 3,272 2,972 6,781 6,180
------------------------------------------------
Other Income:
Loan fees 71 85 148 155
Deposit fees 531 436 1,014 851
Net gain on sale of securities available for sale 23 23 27 53
Gain (loss) on sale of assets (3) 110 (1) 51
Other 158 53 243 126
------------------------------------------------
Total other income 780 707 1,431 1,236
------------------------------------------------
Operating Expenses:
Salaries and employee benefits 2,188 1,378 3,659 2,719
Occupancy expense 314 323 638 644
Office expense 348 296 661 627
FDIC Insurance 10 22 19 44
Data processing fees 340 320 657 609
Professional service fees 154 130 327 212
Marketing 182 194 356 344
Other 656 370 1,156 784
------------------------------------------------
Total operating expense 4,192 3,033 7,473 5,983
------------------------------------------------
Income before income taxes $ (140) $ 646 $ 739 $ 1,433
Income tax benefit - 140 - 140
------------------------------------------------
Net income (140) 786 739 1,573
================================================
Earnings per common and common equivalent share $ (.07) $ .37 $ .32 $ .74
Average common and common equivalent shares outstanding 2,088,567 2,106,305 2,276,585 2,105,252
</TABLE>
See accompanying notes to financial statements.
<PAGE> 2
PRIMARY BANK
Statements of Changes in Stockholders' Equity
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unrealized
Unearned Gain (Loss)
Additional Compensa- on Securities
Common Paid-in Retained tion Available
Stock Capital Earnings ESOP For Sale, Net Total
------ ---------- -------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $19 $15,808 $ 9,090 $(179) $ 228 $24,966
Shares issued under stock incentive plans - 48 - - - 48
Net income for the six months ended
June 30, 1996 - - 1,573 - - 1,573
Change in unrealized gain (loss) on
securities available for sale - - - - (1,535) (1,535)
------------------------------------------------------------------------
Balance at June 30, 1996 $19 $15,856 $10,663 $(179) $(1,307) $25,052
========================================================================
Balance at December 31, 1996 $21 $16,161 $ 12,511 $(143) $ (417) $28,133
Shares issued under stock incentive plans - 820 - - - 820
Net income for the six months ended
June 30, 1997 - - 739 - - 739
Change in unrealized gain (loss) on
securities available for sale, net - - - - 244 244
------------------------------------------------------------------------
Balance at June 30, 1997 $21 $16,981 $ 13,250 $(143) $ (173) $29,936
========================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
PRIMARY BANK
Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 739 $ 1,573
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 750 296
Amortization (accretion) of investment and mortgage-backed securities 56 (30)
Net amortization of deferred loan fees 233 167
Depreciation and amortization expense 501 510
Net gain on sale of securities available for sale (27) (53)
(Gain) loss on sale of loans and other assets 1 (51)
Decrease (increase) in accrued interest receivable 156 (357)
Increase in other assets (6,393) (4,406)
Increase in deferred income tax asset, net (12) (140)
Increase in accrued interest payable 20 39
(Decrease) increase in accrued expenses and other liabilities (42) 14
Net increase in advance payments by borrowers for taxes 71 57
--------------------
Net cash used in operating activities (3,947) (2,381)
--------------------
Cash flows from investing activities:
Maturities and calls of investment securities held to maturity 9,450 4,000
Purchases of investment securities held to maturity (450) (23,040)
Sale of securities available for sale 34,143 7,647
Purchase of investment securities available for sale (29,606) (28,916)
Maturities and calls of securities available for sale 3,000 5,949
Purchases of mortgage-backed securities held to maturity - (3,348)
Principal payments on investment and mortgage-backed
securities held to maturity 1,203 3,011
Principal payments on securities available for sale 6,895 3,565
Purchase of stock in the Federal Home Loan Bank of Boston (836) (27)
Sale of stock in the Federal Home Loan Bank of Boston - 1,343
Proceeds from sales of other real estate owned, net of loans granted 262 502
Net increase in loans receivable (13,196) (4,135)
Proceeds from sales of loans and other assets 6 12,237
Purchase of banking premises and equipment (1,429) (206)
--------------------
Net cash provided by (used in) investing activities 9,442 (21,418)
--------------------
</TABLE>
<PAGE> 4
PRIMARY BANK
Statements of Cash Flows (Unaudited)
(Dollars In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 6,481 $ 599
(Decrease) increase in repurchase agreements (5,425) 142
Increase in borrowed funds 1,368 24,839
Issuance of common stock 820 48
------------------
Net cash provided by financing activities 3,244 25,628
------------------
Net increase in cash and cash equivalents 8,739 1,829
Cash and cash equivalents at beginning of period 12,430 11,040
------------------
Cash and cash equivalents at end of period $21,169 $12,869
==================
Supplemental cash flow information:
Cash paid for the period for:
Interest on deposits and borrowed funds $ 8,135 $ 7,491
Supplemental disclosures of non-cash investing activities:
Loans transferred to real estate owned 116 1,192
Loans charged-off, net 644 993
Loans granted on sales of other real estate owned 354 429
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
PRIMARY BANK
Notes to Financial Statements (Unaudited)
1. Basis of Presentation
The unaudited financial statements of Primary Bank (the "Bank"), have been
prepared in accordance with regulations of the Federal Deposit Insurance
Corporation (the "FDIC"). Certain information required by Generally
Accepted Accounting Principles ("GAAP") has been condensed or omitted
pursuant to such rules and regulations.
The financial statements for the six months ended June 30, 1997 and 1996
include all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation of results for
those interim periods. The results for the six months ended June 30, 1997
are not necessarily indicative of the results expected for the entire year.
It is suggested that these interim unaudited financial statements be read in
conjunction with the audited financial statements of the Bank for the year
ended December 31, 1996.
(a) Impaired Loans
Commercial and commercial real estate loans are considered impaired when it
is probable that the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The amount of
impairment for all impaired loans is determined by the difference between
the present value of the expected cash flows related to the loan using the
original contractual interest rate and its recorded value, or, as a
practical expedient in the case of collateral dependant loans, the
difference between the fair value of the collateral and the recorded amount
of the loan. When foreclosure is probable, impairment is measured based on
the fair value of the collateral. Mortgage and consumer loans which are not
individually significant are measured for impairment collectively.
Loans are placed on non-accrual status when payment of principal or interest
is considered to be in doubt or is past due 90 days or more. Previously
accrued income that has not been collected is reversed from current income,
and subsequent cash receipts are applied to reduce the unpaid principal
balance.
At June 30, 1997, total impaired loans were $1.3 million and had a related
general allowance for loan losses of $147,000. During the period ended June
30, 1997, the average recorded investment in net impaired loans was $1.8
million with $7,000 of interest income being recognized on these loans using
the cash basis method of income recognition.
(b) Earnings per share
Earnings per share is calculated by dividing net income for the period by
the weighted average number of shares of common and common equivalent shares
outstanding during the period. Common equivalent shares include the
incremental shares issued under the treasury stock method for stock options
considered to be exercised. Common shares outstanding exclude uncommitted
ESOP shares and include committed ESOP shares. Earnings per share for
applicable periods have been retroactively adjusted to reflect a 5% stock
dividend paid in January 1997.
<PAGE> 6
PRIMARY BANK
Notes to Financial Statements (Unaudited)
2. Securities Available for Sale
Securities available for sale at June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Corporate and other $ 999 $ - $ (15) $ 984
U.S. Government agencies 7,000 1 (72) 6,929
Mortgage-backed securities:
Fannie Mae 27,693 103 (202) 27,594
Freddie Mac 22,394 76 (153) 22,317
Ginnie Mae 10,649 6 (33) 10,622
----------------------------------------------
Total mortgage-backed securities 60,736 185 (388) 60,533
Marketable equity securities 451 52 (24) 479
----------------------------------------------
Total securities available for sale $69,186 $238 $(499) $68,925
==============================================
</TABLE>
Securities available for sale at December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government agencies $12,999 $ 8 $(220) $12,787
Corporate and other 999 - (12) 987
Mortgage-backed securities:
Fannie Mae 33,284 59 (233) 33,110
Freddie Mac 32,402 39 (260) 32,181
Ginnie Mae 3,577 1 (69) 3,509
----------------------------------------------
Total mortgage-backed securities 69,263 99 (562) 68,800
Marketable equity securities 409 83 (27) 465
----------------------------------------------
Total securities available for sale $83,670 $190 $(821) $83,039
==============================================
</TABLE>
<PAGE> 7
PRIMARY BANK
Notes to Financial Statements
3. Investment Securities Held to Maturity
The amortized cost and fair value of investment securities at June 30, 1997
and December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $49,270 $ 35 $(596) $48,709
SBA Securities 848 7 (3) 852
Municipal obligations (1) 407 - - 407
-----------------------------------------------
Total investment securities $50,525 $ 42 $(599) $49,968
===============================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $58,211 $105 $(493) $57,823
SBA Securities 1,011 11 (7) 1,015
Municipal obligations (1) 421 - - 421
-----------------------------------------------
Total investment securities $59,643 $116 (500) $59,259
===============================================
<FN>
<F1> Municipal obligations represent obligations of cities and towns in New
Hampshire and are not readily saleable.
</FN>
</TABLE>
4. Mortgage-backed Securities:
The amortized cost and fair value of mortgage-backed securities at June 30,
1997 and December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Fannie Mae $ 6,780 $ 29 $(133) $ 6,676
Freddie Mac 1,000 - (69) 931
Ginnie Mae 6,489 127 (105) 6,511
Other backed securities 350 - (8) 342
-----------------------------------------------
Total mortgage-backed securities $14,619 $156 $(315) $14,460
===============================================
</TABLE>
<PAGE> 8
PRIMARY BANK
Notes to Financial Statements
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Fannie Mae $ 7,030 $ 32 $(141) $ 6,921
Freddie Mac 1,000 - (99) 901
Ginnie Mae 7,227 112 (113) 7,226
Other backed securities 424 - (11) 413
-----------------------------------------------
Total mortgage-backed securities $15,681 $144 $(364) $15,461
===============================================
</TABLE>
5. Loans, Net
The composition of the balances of loans at June 30, 1997 and December 31,
1996 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
(Dollars in Thousands)
----------------------
<S> <C> <C>
Residential - fixed rate $ 6,013 $ 5,559
Residential - variable rate 54,893 56,214
Construction 3,601 2,325
Commercial and Multifamily - fixed rate 28,883 27,960
Commercial and Multifamily - variable rate 62,797 59,922
Government guaranteed purchased loans 11,090 6,931
----------------------
Mortgage loans 167,277 158,911
----------------------
Industrial revenue bonds (Municipal obligations) 3,026 894
Commercial - fixed rate 13,424 11,894
Commercial - variable rate 32,191 30,852
Home equity 11,812 11,989
Second mortgage 2,600 2,040
Installment 8,085 8,009
Government guaranteed purchased loans 9,679 10,948
----------------------
Other loans 80,817 76,626
----------------------
Total loans $248,094 $235,537
======================
</TABLE>
<PAGE> 9
PRIMARY BANK
Notes to Financial Statements
6. Other Real Estate Owned
The composition of other real estate owned at June 30, 1997 and December 31,
1996 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
(Dollars in Thousands)
----------------------
<S> <C> <C>
Land $ 465 $ 506
One to four family residential 790 1,102
Commercial real estate 242 325
Multi-family real estate - 110
--------------------
Total OREO $1,497 $2,043
Allowance for losses (17) (63)
--------------------
OREO, net $1,480 $1,980
====================
</TABLE>
7. Deposits
Deposits at June 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
(Dollars in Thousands)
----------------------
<S> <C> <C>
Savings $ 53,235 $ 51,036
Time certificates 155,564 155,128
Money market deposit accounts 22,560 25,915
NOW accounts 44,930 41,544
Demand deposits and official checks 35,282 31,467
----------------------
Total deposits $311,571 $305,090
======================
</TABLE>
8. Borrowed Funds
Borrowed funds at June 30, 1997 and December 31, 1996 include advances from
the Federal Home Loan Bank. Scheduled maturities and interest rates on such
advances are as follows:
<TABLE>
<CAPTION>
June 30, Range of December 31, Range of
1997 Rates 1996 Rates
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Due within one year $55,111 4.69 - 5.99% $42,181 5.39 - 7.32%
Due from one to three years 4,756 6.05 - 6.31% 16,318 4.69 - 6.31%
------- -------
$59,867 $58,499
======= =======
</TABLE>
9. Financial Instruments with Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers,
and to reduce its exposure to fluctuations in interest rates. These
financial instruments include commitments to originate and purchase loans,
standby letters of credit, and undrawn lines of credit to local business and
individuals. The Bank uses its normal underwriting and credit criteria in
evaluating these commitments, and establishes appropriate reserves for these
commitments.
<PAGE> 10
PRIMARY BANK
Note to Financial Statements
In the normal course of business, outstanding commitments not reflected in
the balance sheet as of the dates indicated were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
(Dollars in Thousands)
<S> <C> <C>
Home equity lines of credit $ 8,290 $ 9,485
Commitments to originate loans 7,916 9,323
Commercial business lines of credit 19,303 24,764
Standby letters of credit 524 554
Unadvanced portions of construction loans 1,913 1,079
</TABLE>
10. Income Taxes
A valuation allowance is provided when it is more likely than not that some
portion of the gross deferred tax asset will not be realized. Management
has established a valuation allowance principally for the effect of the
income tax benefit derived from the gross deductible temporary differences.
Management believes the existing net deductible temporary differences that
give rise to the net deferred income tax asset will reverse in periods the
Bank generates net taxable income. At June 30, 1997, the Bank would need to
generate approximately $5.7 million of future net taxable income to realize
the net deferred income tax asset. Management believes that it is more
likely than not that the net deferred income tax asset at June 30, 1997 will
be realized based on the significant reduction in the level of non-
performing assets.
It should be noted, however, that factors beyond Management's control, such
as the general state of the economy and real estate values, can affect
future levels of taxable income and that no assurance can be given that
sufficient taxable income will be generated to fully absorb gross deductible
temporary differences.
As of December 31, 1996, the Bank has net operating loss carryforwards
available for federal tax purposes of $6.0 million. The subsequent
realization of $2.5 million of that amount, attributable to Horizon Bank and
Trust, is subject to limitation as set forth in Internal Revenue Code
Section 382 due to the change in ownership. The remaining $3.5 million may
be subject to significant limitation under the provisions of Section 382 in
the event of a future ownership change.
11. Merger
On April 29, 1997 the Bank announced a definitive agreement under which
Granite State Bankshares Inc. ("GSB") will acquire the Bank through a
merger. The agreement provides that stockholders of the Bank will receive
in a tax free exchange, shares of GSB common stock based on the bid price of
GSB common stock at 12:00 noon on April 29, 1997 of $25.375. Each
outstanding share of the Bank would be converted into .9951 shares of GSB
common stock as defined by the exchange ratio.
<PAGE> 11
PRIMARY BANK
Note to Financial Statements
The exchange ratio for conversion of Primary common stock into GSB common
stock remains fixed until GSB's common stock is above $18.185. Based upon
GSB's common stock price ranging between $16.197 and $18.185, the value to
Bank shareholders increases up to $27.14. If the average bid price of GSB
common stock for the twenty trading days preceding the fifth day prior to
the effective date of the merger is above $18.185, the exchange ratio will
float down from .9951 shares preserving $27.14 of value to Bank
shareholders. If the average bid price of GSB common stock for such twenty
day period is below $16.197, the exchange ratio floats between .9951 and
1.2438 shares. The Bank may terminate the agreement if the average price of
GSB common stock is below $13.533 per share, unless GSB agrees to increase
the exchange ratio. The exchange ratios set forth above were adjusted to
reflect a 3 for 2 stock split of GSB common stock which became effective on
May 9, 1997.
<PAGE> 12
PRIMARY BANK
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Primary Bank reported a net loss of $140,000 or $.07 per share for the
quarter ended June 30, 1997 as compared to net income of $786,000 or $.37
per share for the same quarter ended June 30, 1996. The Bank's net income
for the first six months of 1997 totaled $739,000 or $.32 per share,
compared to net income of $1,573,000 or $.74 per share for the same period
during 1996. The loss in the second quarter ended June 30, 1997 was caused
in part by the recording of a first time charge to compensation expense of
$798,000 to reflect performance based stock options which vest if the market
price of Primary Bank's common stock reaches certain stated levels. During
the second quarter the common stock price levels for vesting of 67,675
performance based stock options were reached. It should be noted that this
charge did not result in a decrease of book value or stockholders' equity.
The quarter ended June 30, 1996 also included a deferred Federal income tax
benefit of $140,000.
Net interest income increased $658,000 or 20.5% from $3.2 million to $3.9
million for the quarters ended June 30, 1996 and June 30, 1997,
respectively. Net interest margin has increased in each of the last four
quarters from 3.45% to 3.80% for the quarters ending June 30, 1996 through
June 30, 1997. This was the result of both increased yields on interest
bearing assets and a $3.1 million reduction in non-performing assets from
$6.6 million at June 30, 1996 to $3.5 million at June 30, 1997. As a
result, non-performing assets were .80% of total assets at June 30, 1997
compared to 1.61% at June 30, 1996.
Non-interest income increased $73,000 or 10.3% to $780,000 for the quarter
ended June 30, 1997 from $707,000 for the same quarter in 1996. This was
primarily the result of increased deposit account fees.
Regulatory Matters
The Bank is in a heavily regulated industry. As a New Hampshire chartered
guaranty (stock) savings bank whose deposits are insured by the FDIC, the
Bank is subject to regulation by federal and state regulatory authorities
including, but not limited to, the FDIC and the New Hampshire Commissioner
of Banks.
The following table below sets forth the regulatory capital ratios of the
Bank at June 30, 1997, calculated in accordance with the capital
requirements. As the table demonstrates at June 30, 1997, the Bank's
capital exceeded all regulatory requirements.
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------
(Dollars in Thousands)
Regulatory
Actual Required Excess Actual Percentage
Capital Capital Amount Percent Required
------- -------- ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Leverage $30,064 $22,026 8,038 6.82% 5.00%
Risk based:
(i) Tier 1 (core) (1) 30,064 9,946 20,118 12.09% 4.00%
(ii) Total 32,747 19,891 12,856 13.17% 8.00%
<FN>
<F1> The Bank's Tier 1 (core) capital is less than its GAAP capital based
upon the regulatory requirement to deduct intangible assets from GAAP
capital. At June 30, 1997, the Bank had intangible assets of $45,000, which
is the amortized premium paid for the purchase of the deposits of a failed
bank from the FDIC in 1991. The premium is being amortized over seven
years.
</FN>
</TABLE>
<PAGE> 13
PRIMARY BANK
Interest Rate Sensitivity
Interest rate risk management is conducted by the Bank as part of its
asset/liability and funds management process and is directed by an
Asset/Liability Management Committee. The primary objective of the Bank's
asset/liability management process is to manage liquidity, maximize net
interest income and return on capital within acceptable levels of risks.
Interest rate risk is analyzed in terms of the projected impact on net
income from potential short and long term changes in interest rates.
Interest rate risk management also seeks to ensure liquidity and capital
adequacy in various rate scenarios relative to regulatory and internal
guidelines.
The matching of assets and liabilities is analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income while a positive gap would tend to adversely affect in net
interest income. A sudden and significant increase in interest rates may
have an adverse impact on the ability of borrowers of the Bank to repay
their loans in accordance with the terms and may also lengthen the period of
time to dispose of other real estate owned. Currently, pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
the FDIC has proposed a policy statement and is developing regulations that
will include an interest rate risk component into the calculation of capital
ratios.
The Bank's net interest spread increased to 3.41% for the six months ended
June 30, 1997, compared to 3.17% for the same period in 1996. The Bank's
interest rate margin also increased to 3.76% for the six months ended June
30, 1997, compared to 3.54% for the same period in 1996. The net interest
margin was negatively affected in the first six months of 1996 by the
increase in prepayments of mortgage-backed securities and government
guaranteed loans. At June 30, 1997, the Bank's cumulative interest rate
sensitivity gap as a percentage of total assets at the one year horizon
stood at a negative 7.9% gap.
Balance Sheets
Total assets of the Bank at June 30, 1997 were $431.7 million compared to
$427.4 million at December 31, 1996, representing an increase of 1.0%.
Investment securities, including available for sale and mortgage-backed
securities, decreased by $24.3 million during the period to $134.1 million
or 31.1% of total assets at June 30, 1997. Net loans increased by $12.5
million or 5.3% during the period to 245.4 million, representing 56.8% of
total assets at June 30, 1997.
Deposits increased by $6.5 million or 2.1% from $305.1 million at December
31, 1996 to $311.6 million at June 30, 1997. Repurchase agreements
decreased $5.4 million to $28.0 million at June 30, 1997 while borrowings
increased $1.4 million to $59.9 million for this same period. Total
stockholders' equity increased as earnings for the six months ended June 30,
1997 were complemented by the appreciation of certain securities in the
available for sale account after tax effects.
<PAGE> 14
PRIMARY BANK
Net Interest Income
Net interest income increased $1.1 million or 16.3% from $6.5 million to
$7.5 million for the six months ended June 30, 1996 and June 30, 1997,
respectively. The interest margin for the six months ended June 30, 1997
was 3.76% compared to 3.54% for the same period of 1996. As discussed
earlier, the interest margin was negatively affected in 1996 due to an
increase in prepayments of mortgage-backed securities and government
guaranteed loans.
Account service fees and other non-interest income
Total non-interest income for the six months ended June 30, 1997 was $1.4
million, compared to $1.2 million for the same period in 1996. The Bank had
non-recurring income of $26,000 and $104,000 related primarily to the
investment and purchased loan portfolio for the six months ended June 30,
1997 and 1996, respectively. Service fees on deposit accounts totaled $1.0
million and $851,000 for the six months ended June 30, 1997 and 1996,
respectively.
Non-Interest Expense - For the Quarter Ended June 30, 1997 compared to the
Quarter Ended June 30, 1996
Non-interest expenses increased by $1.2 million, or 38.2 % from $3.0 million
for the second quarter of 1996 to $4.2 million for the same period of 1997.
Part of this increase is due to the recording of a charge to compensation
expense of $798,000 to reflect performance based stock options which vested
in the second quarter of 1997. Salaries and employee benefits increased
$810,000 from $1.4 million for the second quarter of 1996 to $2.2 million
for the same period in 1997. These increases are primarily due to the
compensation expense for stock options as mentioned above; the opening of a
new branch in Merrimack, NH in the first quarter of 1997; the hiring of
additional loan officers to originate commercial loans in our newer market
areas; as well as normal salary increases made during the year.
Office expenses increased $52,000 or 17.6% from $296,000 for the second
quarter of 1996 to $348,000 in the second quarter of 1997 due to an increase
in the cost and volume of supplies, postage and telephone. Data processing
expenses increased $20,000 or 6.3% from $320,000 in 1996 to $340,000 in 1997
as the Bank incurred additional costs related to such new products as the
automated telephone response system which was implemented in the third
quarter of 1996.
Professional service fees increased $24,000 or 18.5% from $130,000 in the
second quarter of 1996 to $154,000 in the second quarter of 1997 due to
additional costs associated with shareholder information as well as a
reduction in trust income.
Marketing decreased $12,000 or 6.2% from $194,000 in the second quarter of
1996 to $182,000 in the second quarter of 1997 due to timing of expenses.
Other expenses increased $286,000 or 77.3% from $370,000 in 1996 to $656,000
in 1997 due to the compensation expense charge related to performance based
stock options as well as the Bank in 1996 reducing the OREO reserve by
$206,000 while subsequently increasing the allowance for loan losses.
<PAGE> 15
PRIMARY BANK
Non-Interest Expense - For the Six Months Ended June 30, 1997 compared to the
Six Months Ended June 30, 1996.
Non-interest expenses increased by $1.5 million, or 24.9% from $6.0 million
for the six months ended June 30, 1996 to $7.5 million for the same period
of 1997. As mentioned above, the Bank recorded $798,000 in first time
compensation expense related to performance based stock options which became
75% vested in the second quarter of 1997. Salaries and employee benefits
increased $940,000 or 34.6% from $2.7 million in 1996 to $3.7 million in
1997 due to the vested stock options, the opening of a new branch in
Merrimack, NH in the first quarter of 1997; the hiring of additional loan
officers to originate commercial loans; as well as normal salary increases
made during the year.
Office expenses increased $34,000 or 5.4% from $627,000 for the first six
months of 1996 to $661,000 for the same period in 1997 principally due to an
increase in telephone and supplies expense. Data processing expenses
increased $48,000 or 7.9% from $609,000 in 1996 to $657,000 in 1997 as the
Bank incurred additional costs related to new products such as the automated
telephone system which was implemented in the third quarter of 1996.
Professional service fees increased $115,000 or 54.2% from $212,000 for the
first six months of 1996 to $327,000 for the same period in 1997 due to the
ongoing services related to audit, compliance, regulatory as well as loan
review. The Bank also incurred costs related to a cost efficiency study
being performed in 1997.
Marketing expenses increased $12,000 or 3.5% from $344,000 for the first six
months of 1996 to $356,000 for the same period in 1997. Other expenses
increased $372,000 or 47.4% from $784,000 in 1996 to $1.2 million in 1997
due to the compensation charge related to performance based stock options as
well as the Bank in 1996 reducing the OREO reserve by $206,000 while
subsequently increasing the allowance for loan losses.
Provision for Income Taxes
See Note 10.
Net Income
Net income for the six months ended June 30, 1997 was $739,000 a decrease
over net income of $1.6 million for the same period in 1996. Attributing to
the decrease in net income were the recording of $798,000 in compensation
expense related to performance based stock options which became 75% vested
in the second quarter of 1997 due to pricing thresholds of the stock having
been achieved along with a $140,000 deferred income tax benefit recorded in
1996.
Liquidity
The Bank must maintain a sufficient amount of cash and assets which can
readily be converted into cash in order to meet cash outflows from normal
depositor requirements and loan demands. The Bank's primary sources of
funds are deposits, loan amortization and prepayments, sales or maturities
or calls of securities, borrowings and income on earning assets. In
addition, the Bank maintains investments in Federal funds sold and interest
bearing deposits, which can be immediately converted into cash, and
Government Agency securities which can be sold or pledged to raise funds.
<PAGE> 16
PRIMARY BANK
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997 which are
anticipated by the Bank, based upon certain assumptions, to reprice or
mature in each of the future time periods shown. Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period was determined in accordance with the earlier of the term
to repricing or the contractual term of the asset or liability to maturity.
Management has assumed no prepayments of the Bank's fixed-rate loans. The
assumptions used may not be indicative of future withdrawals of deposits or
prepayments of loans. Management uses its judgement in classifying Savings,
NOW and Money Market accounts according to its expectation of their
respective sensitivities to market interest rate changes based on local
market conditions and historical experience.
<TABLE>
<CAPTION>
At June 30, 1997
----------------
(Dollars in Thousands)
----------------------
6 mths 6 mths to 1 yr. to 2 yrs to 3 yrs to 5 yrs to Over
or less 1 yr. 2 yrs. 3 yrs. 5 yrs. 10 yrs. 10 yrs. Total
------- --------- -------- -------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net $ 57,513 $ 45,699 $ 12,666 $ 10,215 $ 12,868 $ 9,545 $16,948 $165,454
Other loans, net 47,918 6,753 5,136 5,765 3,197 1,885 9,998 80,652
Investment securities
held to maturity 997 1,000 19 42 2,402 45,272 793 50,525
Securities available for sale 25,956 16,506 - 9,870 8,870 2,995 4,729 68,926
Mortgage-backed securities
held to maturity 4,000 4,000 6,619 - - - - 14,619
Fed funds and interest-
bearing deposits 7,319 - - - - - - 7,319
FHLB stock 3,986 - - - - - - 3,986
-------------------------------------------------------------------------------------
Total interest-bearing assets $147,689 $ 73,958 $ 24,440 $ 25,892 $ 27,337 $59,697 $32,468 $391,481
Interest-bearing liabilities:
Savings accounts $ 28,857 $ - $ - $ - $ - $ - $24,378 $ 53,235
NOW accounts 6,360 - 19,285 - - 19,285 - 44,930
Money market accounts 22,560 - - - - - - 22,560
Certificates of deposit 65,423 49,429 19,493 12,131 7,009 2,079 - 155,564
Borrowing 77,647 5,465 4,756 - - - - 87,868
-------------------------------------------------------------------------------------
Total interest-bearing liabilities $200,847 $ 54,894 $ 43,534 $ 12,131 $ 7,009 $21,364 $24,378 $364,157
Interest sensitivity gap per period $(53,158) $ 19,064 $(19,094) $ 13,761 $ 20,328 $38,333 $ 8,090 $ 27,324
-------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(53,158) $(34,094) $(53,188) $(39,427) $(19,099) $19,234 $27,324
--------------------------------------------------------------------------
Cumulative interest sensitivity as a
percentage of total assets (12.31%) (7.90%) (12.32%) (9.13%) (4.42%) 4.46% 6.33% 6.33%
-------------------------------------------------------------------------------------
Cumulative net interest-earning assets
as a percentage of interest-bearing
liabilities 73.53% 86.67% 82.23% 87.34% 94.00% 105.66% 107.50% 107.50%
-------------------------------------------------------------------------------------
</TABLE>
<PAGE> 17
PRIMARY BANK
Average Balance Sheet and Net Interest Income Analysis
Net interest income represents the difference between income on interest-
bearing assets and expenses on interest-bearing liabilities. Net interest
income depends upon the volume of interest-earning assets and interest-
bearing liabilities and the interest rates earned or paid on them.
Interest income for the six months ended June 30, 1997 totaled $15.7 million
and reflected an increase of $1.7 million or 12% as compared with the same
period in 1996. Interest expense for the six months ended June 30, 1997
totaled $8.2 million and reflected an increase of $625,000 or 8.3% as
compared with the same period in 1996.
Net interest income for the six months ended June 30, 1997 totaled $7.5
million and reflected an increase of more than $1.1 million or 16.3% as
compared with the same period in 1996. This increase in net interest income
is attributable to relative increases in the levels of average interest-
earning assets and average interest-bearing liabilities of $37.0 million and
$35.1 million, respectively. The net interest margin increased from 3.54%
for the six months of 1996 to 3.76% for the six months of 1997 partially due
to 1996 being negatively affected by prepayments for mortgage-backed
securities and government guaranteed loans.
<PAGE> 18
PRIMARY BANK
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
Average Yield Average Yield
Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Average Assets
Interest-earning assets:
Mortgage loans, net (1) $158,492 $ 6,697 8.45% $144,428 $ 6,066 8.40%
Other loans, net (1) 83,619 3,767 9.08% 83,176 3,707 8.94%
Investment securities held to maturity
and securities available for sale 142,012 4,556 6.42% 118,729 3,664 6.17%
Mortgage-backed securities
held to maturity 15,254 514 6.74% 15,621 411 5.26%
FHLB Stock 3,595 117 6.56% 3,592 113 6.31%
Federal funds and interest-
bearing deposits 1,340 35 5.27% 1,735 45 5.20%
-------------------------------------------------------------
Total interest-earning assets 404,312 15,686 7.82% 367,281 14,006 7.65%
---------------- ----------------
Non-interest earning assets 28,948 24,854
-------- --------
Total assets $433,260 $392,135
======== ========
Average liabilities and
retained earnings
Interest-bearing liabilities:
Savings accounts $ 53,183 $ 646 2.45% $ 51,776 $ 634 2.46%
Money Market and NOW accounts 67,336 608 1.82% 63,939 613 1.92%
Certificate accounts 155,562 4,295 5.57% 154,560 4,463 5.79%
Borrowed funds 96,508 2,606 5.45% 67,204 1,820 5.43%
-------------------------------------------------------------
Total interest-bearing liabilities 372,589 8,155 4.41% 337,479 7,530 4.48%
---------------- ----------------
Non-interest-bearing liabilities 31,705 29,822
-------- --------
Total liabilities 404,294 367,301
Stockholders' equity 28,966 24,834
-------- --------
Total liabilities and stockholders' equity $433,260 $392,135
======== ========
Net interest income/interest rate spread (2) $ 7,531 3.41% $ 6,476 3.17%
================ ================
Net interest-earning assets/
net interest margin (3) $ 31,723 3.76% $ 29,802 3.54%
======== ==== ======== ====
Interest-earning assets
to interest-bearing liabilities 108.51% 108.83%
======== ========
- --------------------
<FN>
<F1> Includes non-accrual loans
<F2> Interest rate spread represents the difference between the average
rate on interest-earning assets and the average cost of interest-
bearing liabilities.
<F3> Net interest margin represents net interest income before the
provision for loan losses divided by average interest-earning assets.
</FN>
<PAGE> 19
PRIMARY BANK
Rate/Volume Analysis
For the quarter ended June 30, 1997, interest income was $8.0 million, an
increase of $976,000 compared to the same period in 1996. Interest expense
for the quarter ended June 30, 1997 increased $318,000 to $4.1 million. Net
interest income increased $658,000 to $3.9 million for the quarter ended
June 30, 1997.
For the six months ended June 30, 1997, interest income was $15.7 million,
an increase of $1.7 million compared to the same period in 1996. This
increase is attributable to (1) an increase due to volume and rate of
$610,000 and $81,000 in the loan portfolio, respectively, and (2) an
increase due to volume and rate of $729,000 and $266,000 in the investment
securities, securities available for sale and mortgage-backed portfolio,
respectively.
Interest expense for the six months ended June 30, 1997 increased by
$625,000 to $8.2 million. Borrowings increased due to volume by $779,000.
Certificate of deposit accounts decreased due to rate by $193,000 which was
partially offset by an increase due to volume of $25,000. The increase in
volume for borrowings was used to fund the purchase of investment
securities. Total net interest income increased for the six months ended
June 30, 1997 by $1.1 million. The effect on net interest income is a
result of changes in interest rates and in the volume of earning assets and
interest bearing liabilities as shown in the following table.
Information is provided on changes attributable to (1) changes in volume
(change in average balance multiplied by prior period yield), (2) change in
rate (changes in yield multiplied by prior period average balance).
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 vs. 1996
---- ----
Changes Due to Increase (Decrease)
----------------------------------
(Dollars in Thousands)
----------------------
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Interest Income
Mortgage loans $ 595 $ 36 $ 631
Other loans 15 45 60
Investment securities held to maturity
and securities available for sale 739 153 892
Mortgage-backed securities
held to maturity (10) 113 103
FHLB Stock - 4 4
Federal funds and interest-bearing
deposits (11) 1 (10)
----------------------------------
Net change in income on interest-
earning assets $1,328 $352 $1,680
Interest Expense
Savings accounts $ (15) $ 3 $ (12)
Money market and NOW accounts (30) 35 5
Certificate accounts (25) 193 168
Borrowed funds (779) (7) (786)
----------------------------------
Net change in expense on interest-
bearing liabilities (849) 224 (625)
----------------------------------
Net change in interest income $ 479 $576 $1,055
==================================
</TABLE>
<PAGE> 20
PRIMARY BANK
Provision for Loan Losses
The allowance for loan losses represents amounts available to absorb future
loan losses. The level of the allowance is based on management's assessment
of the degree of risk associated with the number and type of loans in the
loan portfolio. Management uses a number of tools to determine the
appropriate level of the allowance, including an internal loan grading
system, outside appraisals of real estate loans, external loan review, and
historical loss experience of certain types of loans. The allowance is
reviewed monthly by the Board of Directors of the Bank, although there can
be no assurance that the provision for loan losses will be adequate.
The provision for loan losses for the six months ended June 30, 1997 was
$750,000 compared to $296,000 for the same period in 1996. Total non-
performing loans decreased by $76,000 from $2.1 million at December 31, 1996
to $2.0 million at June 30, 1997. The allowance at June 30, 1997 and
December 31, 1996 as a percentage of non-performing loans was 135% and
124.9%, respectively. Total non-performing assets were $3.5 million at June
30, 1997, compared with $4.0 million at December 31, 1996 and $6.6 million
at June 30, 1996. At June 30, 1997, non-performing assets were .80% of
total assets, compared to .95% at December 31, 1996 and 1.61% at June 30,
1996.
A summary of the transactions in the allowance for loan losses is as
follows: (see Note 1)
<TABLE>
<CAPTION>
Six Months Ended Year ended Six Months Ended
June 30, December 31, June 30,
1997 1996 1996
---------------- ------------ ----------------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C>
Balance at beginning of period $2,577 $ 3,447 $ 3,447
Provision charged to operations 750 722 296
Recoveries 43 235 165
Net realized losses charged to allowance (687) (1,827) (1,158)
------------------------------------------
Balance at end of period $2,683 $ 2,577 $ 2,750
==========================================
</TABLE>
The following table represents information regarding non-performing loans
and assets. (See Note 1)
<TABLE>
<CAPTION>
At At At
June 30, December 31, June 30,
1997 1996 1996
-------- ------------ --------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C>
Loans on non-accrual
Mortgage loans $1,823 $1,873 $3,769
Other loans 165 191 266
----------------------------------
Total non-performing loans(1) $1,988 $2,064 $4,035
----------------------------------
Other real estate owned 1,480 1,980 2,555
----------------------------------
Total non-performing assets $3,468 $4,044 6,590
==================================
</TABLE>
<PAGE> 21
PRIMARY BANK
<TABLE>
<CAPTION>
At At At
June 30, December 31, June 30,
1997 1996 1996
-------- ------------ --------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C>
Non-performing loans as % of
total gross loans .80% .88% 1.81%
Non-performing assets as % of
total assets .80% .95% 1.61%
<FN>
<F1> Loans are placed in non-accrual status when they become contractually
past due 90 days or more, or there is doubt as to the full and timely
payment of principal and interest. Once a loan is placed on non-
accrual status, previously accrued but unpaid interest is reversed in
the current period against interest income. Interest accrued is
resumed only when Management analysis determines that the loans are
fully collectible as to principal and interest.
</FN>
</TABLE>
<PAGE> 22
PRIMARY BANK
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Bank has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PRIMARY BANK
Date: August 12, 1997 /s/ Michael J. Janosco, Jr.
----------------------- -------------------------------
Michael J. Janosco, Jr.
Senior Vice President &
Chief Financial Officer
PRIMARY BANK
Date: August 12, 1997 /s/ William M. Pierce, Jr.
----------------------- -------------------------------
William M. Pierce, Jr.
Controller
<PAGE> 23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,064
<INT-BEARING-DEPOSITS> 13,781
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99,169<F1>
<INVESTMENTS-CARRYING> 12,500
<INVESTMENTS-MARKET> 12,509
<LOANS> 247,605<F2>
<ALLOWANCE> 3,820
<TOTAL-ASSETS> 414,167
<DEPOSITS> 335,022
<SHORT-TERM> 37,839<F3>
<LIABILITIES-OTHER> 4,337
<LONG-TERM> 660
0
0
<COMMON> 3,961
<OTHER-SE> 32,348
<TOTAL-LIABILITIES-AND-EQUITY> 414,167
<INTEREST-LOAN> 15,156
<INTEREST-INVEST> 5,320
<INTEREST-OTHER> 343
<INTEREST-TOTAL> 20,819
<INTEREST-DEPOSIT> 8,922
<INTEREST-EXPENSE> 9,925
<INTEREST-INCOME-NET> 10,894
<LOAN-LOSSES> 325
<SECURITIES-GAINS> 2,149
<EXPENSE-OTHER> 8,110
<INCOME-PRETAX> 6,320
<INCOME-PRE-EXTRAORDINARY> 4,024
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,024
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 4.21
<LOANS-NON> 2,198
<LOANS-PAST> 262
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,676
<CHARGE-OFFS> 242
<RECOVERIES> 61
<ALLOWANCE-CLOSE> 3,820
<ALLOWANCE-DOMESTIC> 3,820
<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 and short-term borrowings
from the Federal Home Loan Bank of Boston.
</FN>
</TABLE>
