SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 0-14895
December 31, 1997
Granite State Bankshares, Inc.
(Exact name of registrant as specified in its charter)
New Hampshire 02-0399222
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g)of the Act: Common Stock,
$1.00 par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained to the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
Issuer's revenues for its fiscal year ended December 31, 1997 were
$66,110,000.
The aggregate market value of the voting common stock held by non-
affiliates of the Registrant, based on the closing bid price of March 19, 1998,
was $137,078,493. For purposes of this calculation, the affiliates of the
Registrant include its directors and executive officers. Although such
directors and executive officers of the Registrant performing policy-making
functions were assumed to be "affiliates" of the Registrant, this
classification is not to be interpreted as an admission of such status.
As of March 19, 1998, the number of shares of the Registrant's common
stock outstanding of record (exclusive of treasury shares) was 5,848,742.
<PAGE> 1
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated Part of the Annual Report on
Form 10-K:
Document Part
-------- ----
Annual Report to Stockholders for Part I, Item 1 (c) (5),
the year ended December 31, 1997 "Statistical Information"
Part II, Item 6
"Selected Financial Data"
Part II, Item 7,
"Management's Discussion and
Analysis of Financial Condition and
Results of Operations"
Part II, Item 7a,
"Quantitative and Qualitative
Disclosures About Market Risk"
Part II, Item 8
"Financial Statements and
Supplementary Data"
Proxy Statement for the 1998 Part III, Item 10,
Annual Meeting of Stockholders "Directors and Executive Officers
of the Registrant"
Part III, Item 11,
"Executive Compensation"
Part III, Item 12,
"Security Ownership of Certain
Beneficial Owners and Management"
Part III, Item 13,
"Certain Relationships and
Related Transactions"
<PAGE> 2
Form 10-K Annual Report -- Table of Contents
PART I
Page
Item 1. Description of Business 5
a. General Development of Business 5
b. Financial Information About Industry Segments 5
c. Narrative Description of Business 6
1. General Description of Business 6
2. Regulation & Supervision 7
3. Monetary Policies 12
4. Employees 12
5. Statistical Information 12
A. Distribution of Assets, Liabilities,
and Stockholders' Equity; Interest
Rates and Interest Differential 12
B. Rate/Volume Analysis 12
C. Investment Portfolio 13
D. Loan Portfolio 16
E. Maturity of Loans 16
F. Nonperforming Loans and Assets 17
G. Summary of Loan Loss Experience and
Allocation of the Allowance for
Possible Loan Losses 19
H. Risks Associated with Commercial
Real Estate, Commercial and
Construction Loans 21
I. Deposits 21
J. Maturities of Time Deposits 22
K. Return on Equity and Assets 22
L. Borrowings 22
M. Competition 23
N. Subsidiaries 23
d. Financial Information About Foreign and
Domestic Operations and Export Sales 23
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Additional Item Executive Officers 25
<PAGE> 3
PART II
Page
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 26
a. Market Information 26
b. Holders 26
c. Dividends 26
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 7a.Quantitative and Qualitative Disclosures About
Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
a. Financial Statements Required by Regulation S-X 27
b. Supplementary Financial Information 27
1. Selected Quarterly Financial Data 27
2. Information on the Effects of Changing Prices 27
3. Information About Oil and Gas Producing
Activities 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 28
a. List of Documents filed as Part of this Report 28
1. Financial Statements 28
2. Financial Statement Schedules 28
b. Reports on Form 8-K 29
c. Exhibits 29
Signatures 31
<PAGE> 4
PART I
Item 1. Description of Business
(a) General Development of Business
Granite State Bankshares, Inc. ("Granite State" or "Company") is a
single-bank holding company which was formed in 1986 to acquire all of
the stock of the Granite Bank, formerly Granite Bank of Keene and Keene
Savings Bank, upon its conversion from a mutual savings bank to a state-
chartered guaranty (stock) savings bank. Since that time, the Company
has acquired Primary Bank, the Durham Trust Company, First Northern Co-
operative Bank, First National Bank of Peterborough and the Granite
Bank of Amherst.
In March of 1987, Granite State organized a mortgage corporation,
GSBI Mortgage Corporation, for purposes of expanding the residential
loan programs it could offer, as well as improving the efficiency and
effectiveness of its participation in the secondary mortgage markets.
The mortgage corporation now operates as a division of Granite Bank and
services Cheshire, Hillsborough, Strafford, Merrimack and Rockingham
counties, New Hampshire, with a wide variety of mortgage loan products.
In July of 1987, the Granite Bank of Amherst opened for business
as a state-chartered guaranty (stock) savings bank, and was the
result of the purchase from the Amoskeag Bank of their Amherst
branch office. In June of 1989 it was merged into the First National Bank
of Peterborough under the name of Granite Bank, N.A. In March of 1990
Granite Bank, N.A. was merged into Granite Bank.
In October of 1988, First Peterborough Bank Corp. was merged into
Granite State, leaving Granite State with the First National Bank of
Peterborough ("First National"). First National was a national bank
engaged in substantially all of the business operations customarily
conducted by a commercial bank in New Hampshire. In June of 1989 the
name was changed to Granite Bank, N.A., when it absorbed Granite Bank of
Amherst. In March of 1990, Granite Bank, N.A. was merged into Granite
Bank.
In August of 1991, Granite Bank entered into a purchase and
assumption agreement with the Resolution Trust Company ("RTC"), whereby
it acquired certain assets and assumed certain liabilities of First
Northern Co-operative Bank ("First Northern"), headquartered in Keene,
New Hampshire, which was under RTC conservatorship.
In November of 1991, Granite Bank entered into a purchase and
assumption agreement with the Federal Deposit Insurance Corporation
("FDIC"), whereby it acquired certain assets and assumed certain
liabilities of Durham Trust Company ("Durham"), headquartered in Durham,
New Hampshire. The FDIC was the liquidating agent of Durham Trust
Company.
Granite Bank completed its conversion from a state-chartered guaranty
(stock) savings bank to a New Hampshire state-chartered commercial bank
during 1991.
In April of 1997, the Company entered into an Agreement and Plan of
Reorganization as amended and a related Agreement and Plan of Merger as
amended, whereby the Company acquired Primary Bank, headquartered in
Peterborough, New Hampshire and merged Primary Bank with and into it's
wholly owned subsidiary, Granite Bank. The acquisition and related
merger was effective after the close of business October 31, 1997. See
also Note B to the Consolidated Financial Statements in the Annual
Report to Stockholders for the year ended December 31, 1997 which is
incorporated herein by reference.
(b) Financial Information about Industry Segments
Not applicable.
(c) Narrative Description of Business
<PAGE> 5
(1) General Description of Business
Granite State operates as a single bank holding company by virtue of
its ownership of 100% of the stock of Granite Bank, a New Hampshire
chartered commercial bank (referred to as the "Bank"). The Company has
grown profitably over the past several years through several strategic
acquisitions and by leveraging its capital. This activity strengthened
the franchise and assisted in the transition from a thrift institution
into a full-service commercial bank. Currently, the Company does not
transact any significant business other than through the Bank.
The Bank has been and continues to be a community oriented commercial
bank offering a variety of financial services. The principal business
of the Bank consists of attracting deposits from the general public and
underwriting loans secured by residential and commercial real estate and
other loans. The bank also originates fixed rate residential real
estate loans for sale in the secondary mortgage market.
In recent years, the Bank has concentrated its efforts on expanding
its franchise through increased emphasis on commercial real estate loans
and the introduction of new deposit products. The Company has, and
continues to devote considerable resources toward the enhancement of
computer systems and operating procedures to position itself to compete
effectively in its local markets.
The Bank offers a wide range of consumer and commercial services,
including: commercial demand deposits, consumer regular and interest-
bearing (NOW) checking and regular savings accounts; certificates of
deposit; residential and commercial real estate loans; secured and
unsecured consumer and commercial loans; and cash management services.
The Company's distribution network for its services is comprised of
its main office in Keene, full-service banking offices in Antrim,
Amherst, Chesterfield, Concord, Durham, Hillsborough, Jaffrey,
Merrimack, Milford, Nashua, Portsmouth, Peterborough and Weare and 41
automatic teller machines ("ATMs") located in Antrim, Amherst,
Chesterfield, Concord, Dublin, Durham, Fitzwilliam, Greenfield,
Hillsborough, Jaffrey, Keene, Merrimack, Milford, Nashua, Portsmouth,
Peterborough, West Swanzey, North Swanzey and Weare. All of the office
and ATM locations are in the State of New Hampshire.
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium (year 2000)
approaches. The "year 2000" problem is pervasive and complex as
virtually every computer operation will be affected in some way by the
rollover of the two digit year value to 00. The issue is whether
computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be
completed by December 31, 1998, allowing adequate time for testing. To
date, confirmations have been received from the Company's primary
processing vendors that plans are developed to address processing of
transactions in the year 2000 and plans are in the process of being
developed for actual testing. Management believes that costs related to
the year 2000 compliance will not have any significant adverse affect on
the Company's earnings.
Risk Management
- ---------------
In the normal course of business, the Company is subject to various
risks, the most significant of which are credit, liquidity and interest
rate risk. Although the Company cannot eliminate these risks, it has
risk management processes designed to provide for risk identification,
measurement, monitoring and control.
<PAGE> 6
Credit Risk
- -----------
Credit risk represents the possibility that a customer or
counterparty may not perform in accordance with contractual terms.
Credit risk results from extending credit to customers, purchasing
securities and entering into certain off-balance-sheet financial
transactions (which are primarily commitments to originate loans,
unused lines and standby letters of credit or unadvanced portions of
construction loans). Risk associated with the extension of credit
(including off-balance sheet items) includes general risk, which is
inherent in the lending business,and risk specific to individual borrowers.
Risk associated with purchasing securities primarily centers around the
credit quality of the issuer of the security. The Company seeks to manage
credit risk through portfolio diversification, investments in highly rated
securities, underwriting policies and procedures and loan monitoring
practices.
Liquidity Risk
- --------------
Liquidity represents an institution's ability to generate cash or
otherwise obtain funds at reasonable rates to satisfy commitments to
borrowers and demands of depositors and invest in strategic initiatives.
Liquidity risk represents the likelihood the Company would be unable to
generate cash or otherwise obtain funds at reasonable rates for such
purposes. Liquidity is managed through the coordination of the relative
maturities of assets, liabilities and off-balance sheet positions and is
enhanced by the ability to raise funds with direct borrowings.
Interest Rate Risk
- ------------------
Interest rate risk arises primarily through the Company's normal
business activities of extending loans and taking deposits. Interest
rate risk is the sensitivity of net interest income and the market value
of financial instruments to the timing, magnitude and frequency of
changes in interest rates. Interest rate risk results from various
repricing frequencies and the maturity structure of assets, liabilities
and off-balance-sheet positions. Interest rate risk also results from,
among other factors, changes in the relationship or spread between
interest rates. Many factors, including economic and financial
conditions, general movements in market interest rates and consumer
preferences, affect the spread between interest earned on assets and
interest paid on liabilities. Interest rate caps are used to alter the
interest rate characteristics on the net interest spread. The Company
uses a number of measures to monitor and manage interest rate risk,
including financial planning models which recalculate the fair value of
the Company assuming instantaneous, permanent parallel shifts in market
interest rates.
For additional information relating to the Company's risk management
processes, see Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual
Report to Stockholders for the year ended December 31, 1997, which is
incorporated herein by reference.
(2) Regulation and Supervision
General
- -------
Granite State is a registered bank holding company under the Bank
Holding Company Act of 1956 ("BHCA"), and as such, is subject to
regulation by the Federal Reserve Board ("FRB"). Granite Bank is a New
Hampshire-chartered commercial bank, the deposit accounts of which are
insured by the FDIC. As such, it is subject to the regulation,
supervision and examination of the New Hampshire Bank Commissioner
("Commissioner") and the FDIC. See "New Hampshire Law" and "Insurance
of Deposits". It is a member of the Federal Home Loan Bank of Boston
("FHLB").
<PAGE> 7
New Hampshire Law
- -----------------
As a New Hampshire-chartered commercial bank, Granite Bank is subject
to the applicable provisions of state law and the regulations adopted
thereunder by the Commissioner. Granite Bank derives its lending and
investment powers from New Hampshire law and is subject to periodic
examination by and reporting requirements of the Commissioner, who also
has specific statutory jurisdiction over certain banking activities,
mergers and the creation of new powers. The Commissioner has authority
to take various enforcement actions against banks, or bank directors or
officers, that engage in violations of law or unsafe or unsound
practices. The Commissioner also may appoint a receiver or conservator
for a bank under certain circumstances.
The Bank is required under New Hampshire law to maintain a reserve of
the lesser of not less than 12% of the amount of demand deposits and 5%
of the amount of time and savings deposits in cash or in specified
short-term investments, or the reserve requirements established by the
FRB. At December 31, 1997 this requirement was satisfied.
Granite State is also subject to the periodic examination and
reporting requirements of the Commissioner. Under New Hampshire law,
Granite State may not acquire ownership or control of more than 12
banking affiliates, including (i) banking institutions chartered by the
state and actively engaged in business as such in the State and (ii)
national banks authorized to transact business in the State, neither may
it acquire ownership or control of any of the foregoing if, as a result,
the Company and its banking affiliates would hold deposits in New
Hampshire in excess of 20% of the total deposits of all federal and
state-chartered banking institutions, including savings associations,
operating in New Hampshire. At the present time the total of the Bank's
deposits are substantially less than 20% of total New Hampshire
deposits.
The Bank pays assessments to the Commissioner's office to support its
operations. In 1997, these assessments totaled $ 12,214.
Federal Deposit Insurance Corporation
- -------------------------------------
Safety and Soundness Regulations
- --------------------------------
The federal regulatory agencies, including the FDIC, were required to
prescribe standards for depository institutions under their jurisdiction
relating to a variety of operating matters such as internal controls,
information systems and internal audit systems, loan documentation and
credit underwriting, interest rate risk exposure, asset growth and
quality and employee compensation. The federal banking agencies have
adopted a final rule containing Interagency Guidelines Prescribing
Standards for Safety and Soundness ("Guidelines") to implement safety
and soundness standards required under the Federal Deposit Insurance
Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and
information systems; internal audit systems; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking
agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to
submit to the agency an acceptable plan to achieve compliance with the
standard, as required by the Federal Deposit Insurance Act. The final
rule establishes deadlines for the submission and review of such safety
and soundness compliance plans when such plans are required.
<PAGE> 8
Investment Authority
- --------------------
The FDIC regulations restrict investments by and activities of
insured state banks such as the Bank. Effective December 19, 1992,
neither state banks nor their subsidiaries may engage in activities, as
principal, not permissible for national banks or their subsidiaries
unless the FDIC determines that the activity would pose no significant risk
to the deposit insurance fund and the bank is and continues to comply with
applicable federal capital standards. Additionally, subject to exceptions
for majority-owned subsidiaries and certain other limited exceptions, state
banks may not acquire or retain any equity investment of a type or in an
amount not permissible for national banks. The Federal Deposit Insurance Act
does contain a partial exception from these requirements for stock and mutual
fund ownership by banks which were authorized to make such investments by
state law and had made such investments during a specified time period. The
Bank believed it qualified for the exception and applied to the FDIC for
approval. During 1993, the Bank received approval from the FDIC to invest in
equity securities listed on a national exchange and registered shares of
mutual funds, which are otherwise impermissible investments for national
banks, in an amount not to exceed 100 percent of its Tier 1 capital,
which amounted to $57,342,000 at December 31, 1997.
Capital Requirements
- --------------------
The FDIC has issued regulations that require Bank Insurance Fund-
insured banks, such as the Bank, to maintain minimum levels of capital.
The regulations establish a minimum leverage (core) capital requirement
of not less than 3% core capital to total assets for banks in the
strongest financial and managerial condition, with a CAMELS Rating of 1
(the highest rating of the FDIC for banks). For all other banks, the
minimum leverage capital requirement is 3% plus an additional cushion of
at least 1% to 2%. Core capital is comprised of the sum of common
stockholders' equity, noncumulative perpetual preferred stock (including
any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying
servicing rights and purchased credit card relationships), identified
losses and investments in certain subsidiaries. At December 31, 1997,
the Bank's ratio of core capital to average total assets equaled 7.23%,
which exceeded the minimum leverage requirement.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of a ratio of
total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8.00%. In determining the amount
of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the
risks the FDIC believes are inherent in the type of asset. The
components of core capital are equivalent to those discussed earlier
under the leverage capital requirement. The components of supplementary
capital currently include cumulative perpetual preferred stock, long
term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses included in
supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of capital counted toward supplementary
capital cannot exceed 100% of core capital. At December 31, 1997, the
Bank met its risk based capital requirements with a core risk-based
capital to risk-weighted assets ratio of 11.24% and a total risk-based
capital to risk-weighted assets ratio of 12.49%.
Prompt Corrective Action Regulations
- ------------------------------------
Effective December 19, 1992, the regulatory agencies, including the
FDIC, were required to take certain supervisory actions against
undercapitalized banks. The severity of such action depends upon the
degree of undercapitalization. The regulations generally require
subject to a narrow exception, the appointment of a receiver or
conservator for banks whose tangible capital level falls below 2% of
assets, which appointment is to be made within a maximum of 270 days
after the threshold is reached. At December 31, 1997, the subsidiary
bank was considered "well capitalized" for purposes of the FDIC's prompt
corrective action regulations. See also Capital Resources and Liquidity
- - Capital Resources in the
<PAGE> 9
Management's Discussion and Analysis Section of the Annual Report to
Stockholders for the year ended December 31, 1997.
The FDIC may institute proceedings against any insured bank or any
director, trustee, officer or employee of such bank who engages in
unsafe and unsound practices, or the violation of applicable laws and
regulations. The FDIC has the authority to terminate or suspend
insurance of accounts pursuant to procedures established for that purpose
and may appoint a receiver or conservator under certain circumstances.
Insurance of Deposits
- ---------------------
The deposit accounts of the Bank are insured by the FDIC up to
applicable limits, generally $100,000 per insured depositor. The FDIC
issues regulations, conducts periodic examinations, requires the filing
of reports and generally supervises the operations of its insured banks.
The approval of the FDIC is required prior to a merger or consolidation,
or the establishment or relocation of an office facility. The majority
of the Bank's deposits are insured by the Bank Insurance Fund ("BIF").
Approximately 6.3% of the Bank's deposits are OAKAR deposits, which are
deposits purchased from institutions previously insured by the Savings
Association Insurance Fund ("SAIF"), and are assessed at the premium
rate applicable to SAIF deposits.
During 1997, the Bank paid annual insurance premiums of $82,000
compared with $118,000 in 1996.
The FDIC has issued regulations which established a system for
setting deposit insurance premiums based upon the risks a particular
bank or savings association poses to the deposit insurance funds. Under
the rule, the FDIC assigns an institution to one of three capital
categories consisting of 1) well capitalized, 2) adequately capitalized
or 3) undercapitalized, and one of three supervisory subcategories. An
institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. In view of the BIF's
achieving a statutory required capitalization ratio, the FDIC adopted a
new assessment rate of 0 to 27 basis points per $100 of deposits.
On September 30, 1996, the President of the United States signed
into law the Deposit Insurance Funds Act of 1997 (the "Funds Act")
which, among other things, imposed a special one-time assessment on SAIF
deposits to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment on SAIF assessable deposits held as of
March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment on the Bank's SAIF -
assessable OAKAR deposits was recognized as an expense in the quarter
ended September 30, 1996 and was paid by the Bank during the quarter
ended December 31, 1996 and was tax deductible. The SAIF Special
Assessment recorded by the Bank amounted to $187,000.
The Funds Act also spreads the obligations for payment of the
Financing Corporation ("FICO") bonds across all SAIF and BIF members.
Beginning on January 1, 1997, BIF deposits will be assessed for FICO
payments at a rate of 20% of the rate assessed on SAIF deposits. Based
on current estimates by the FDIC, BIF deposits will be assessed a FICO
payment of 1.3 basis points, while SAIF deposits will pay an estimated
6.3 basis points. Full pro rata sharing of the FICO payments between
BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The Funds Act specifies that the BIF
and SAIF will be merged on January 1, 1999, provided no savings
associations remain as of that time.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0
to 27 basis points effective January, 1, 1997, a range comparable to
that of BIF members. However, SAIF deposits will continue to be
assessed at the higher FICO rate described above. Management cannot
predict the level of FDIC insurance assessments on an on-going basis, or
whether the BIF and SAIF will eventually be merged.
<PAGE> 10
Federal Reserve System
- ----------------------
Under FRB regulations, the Bank is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts),
non-personal money market deposit accounts, and non-personal time
deposits. Because reserves must generally be maintained in cash or in
non-interest bearing accounts, the effect of the reserve requirement is
to increase the Bank's cost of funds. For most of 1997, these
regulations required reserves of 3% of total transaction accounts of up
to $49.3 million. Total transaction accounts amounting to over $ 49.3
million required a reserve of $1.5 million plus 10% (this rate is set by the
FRB and can range from 8% to 14%) of that portion of total transaction
accounts in excess of such amount. In addition, reserves in the amount of
3% must be maintained on non-personal money market deposit accounts.
Institutions were permitted to designate and exempt $4.4 million of
reservable liabilities from these reserve requirements. These amounts and
percentages are subject to adjustment by the FRB. The Bank was in
compliance with its reserve requirements at December 31, 1997. The Bank
also has the authority to borrow from the Federal Reserve Board "discount
window" to meet its short-term liquidity needs.
During December, 1997, the amount of reservable liabilities exempt
from reserve requirements was increased to $4.7 million and the level at
which reservable liabilities would be subject to the 10% rate was
lowered to $47.8 million. Under the FRB regulations the survivor of a
merger is also entitled to a tranche loss adjustment in the calculation
of the reserve requirement. In connection with the acquisition of
Primary Bank the Company received a tranche loss adjustment of $3.6
million as of October 31, 1997. This tranche loss adjustment is reduced
by 12.5% approximately every 3 months and will be reduced to zero by
August 12, 1999. The effects of these recent actions will not have any
significant impact on the Bank's liquidity and profitability.
Under the Federal Change in Bank Control Act ("CIBCA"), a prior
notice must be submitted to the FRB if any person or group acting in
concert seeks to acquire 10% or more of Granite State common stock,
unless (if less than 25% is to be beneficially owned) the FRB finds that
the acquisition will not result in change in control. Under CIBCA, the
FRB has 60 days within which to act, taking into consideration factors
similar to those under the Bank Holding Company Act ("BHCA"). Under the
BHCA, any company would be required to obtain prior approval from the
FRB before obtaining control of the Holding Company. Control generally
is defined as beneficial ownership of 25 percent or more of any class of
voting securities of the Company. An existing bank holding company
would need to receive prior FRB approval before acquiring more than 5%
of the voting securities of the Company.
Granite State and its subsidiary are subject to examination,
regulation and periodic reporting by the FRB under the BHCA. FRB
approval is required for acquisitions of either financial institutions
or other entities, or the commencement of new activities by the Company.
Pursuant to recent legislation, interstate holding company acquisitions
of banks are permitted generally without regard to state law, except
state laws regarding deposit concentration. The legislation also
contemplates interstate expansion by bank merger or de novo branching if
the states involved allow. Granite State and its subsidiary may engage
only in activities that are deemed to be related to banking by the FRB.
The FRB has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those of
the FDIC for the Bank.
The Federal Reserve Board has issued guidelines for a risk-based
approach to measuring the capital adequacy of bank holding companies and
state-chartered banks which are members of the Federal Reserve System.
These capital requirements generally call for an 8 percent total capital
ratio, of which 4 percent must be comprised of Tier I capital. Risk-
based capital ratios are calculated by weighting assets and off-balance
sheet instruments according to their relative credit risks. In addition
to the risk-based capital standard, bank holding companies such as the
Company must maintain a minimum leverage ratio of Tier I capital to
total assets of at least 4 percent, with Tier I capital for this purpose
being defined consistent with the risk-based capital guidelines. At
December 31, 1997, Granite State had consolidated Tier I and total
<PAGE> 11
risk-based capital ratios of 11.62% and 12.87%, respectively and a leverage
ratio of Tier I capital to average total assets of 7.47%.
Federal Home Loan Bank System
- -----------------------------
Granite Bank is a member of the FHLB of Boston, which is one of 12
regional Federal Home Loan Banks. The FHLB serves as a reserve or
central bank for its members. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the Federal Home
Loan Bank system. It makes advances (i.e., loans) to members in
accordance with policies and procedures established by the Board
of Directors of the FHLB. The Bank's membership in the FHLB is voluntary
and can be terminated by the Bank at any time when its advances are
paid.
As a member of the FHLB, the Bank is required to purchase and hold
stock in the FHLB in an amount equal to the greater of 1% of the
aggregate of unpaid residential mortgage loan balances and the carrying
value of mortgage-backed securities outstanding at the beginning of the
year; 5% of FHLB advances outstanding; or 1% of 30% of total assets. As
of December 31, 1997, Granite Bank held stock in the FHLB in the amount
of $7,201,000 and was required to maintain an investment in such stock
of $2,887,000.
(3) Monetary Policies
Granite State and the Bank are affected by the monetary and fiscal
policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the
national economy and in the money markets, it is impossible for the
management of Granite State to accurately predict future changes in
monetary policy or the effect of such changes on the business or
financial condition of Granite State.
(4) Employees
As of December 31, 1997, Granite State and its subsidiary employed
276 full time equivalent officers and employees. Granite State
considers relations with its employees to be satisfactory. None of the
employees of the Company or its subsidiary are represented by a
collective bargaining group.
(5) Statistical Information
The statistical information on Granite State set forth in the
following sections is furnished pursuant to Industry Guide 3 under the
Securities Exchange Act of 1934.
(A) Distribution of Assets, Liabilities, and Stockholders'
Equity; Interest Rates and Interest Differential
Information regarding the distribution of assets, liabilities and
stockholders' equity; interest rates and interest differential for each
of the three years in the period ended December 31, 1997, on page 19 of
the Annual Report to Stockholders for the year ended December 31, 1997
are incorporated herein by reference.
(B) Rate/Volume Analysis
Information regarding the dollar amount of changes in interest income
and interest expense for interest earning assets and interest bearing
liabilities attributable to changes in interest rates and changes in
volume for each of the two years in the period ended December 31, 1997,
on page 20 of the Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated herein by reference.
<PAGE> 12
(C) Investment Portfolio
Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity and reported at
amortized cost; debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified
as trading and reported at fair value, with unrealized gains and losses
included in earnings; and debt and equity securities not classified as
either held-to-maturity or trading are classified as available-for-sale
and reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders'
equity, net of estimated income taxes. The Company classifies its
securities into three categories: held-to-maturity, available-for-sale and
held for trading. The Company had no securities classified as trading
securities at or during the years ended December 31, 1997, 1996 and 1995.
In the fourth quarter of 1997 the acquisition of Primary Bank necessitated a
transfer of securities held to maturity with an amortized cost of $22,226,000
and a net unrealized loss of $156,000 to securities available for sale in
order to maintain the Company's existing interest rate risk profile.
The following table sets forth the amortized cost, unrealized gains
and losses, and estimated market values of securities held to maturity and
securities available for sale at December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
Securities held to maturity
At December 31, 1997
US Government agency
obligations $ 33,910 $ 285 $ 25 $ 34,170
------- ------ ------ -------
Total securities held
to maturity $ 33,910 $ 285 $ 25 $ 34,170
======= ====== ====== =======
Securities available for sale
At December 31, 1997
US Treasury obligations $ 82,470 $ 499 $ $ 82,969
US Government agency
obligations 44,218 31 50 44,199
Other corporate obligations 8,493 16 1 8,508
Mortgage-backed securities:
FNMA 11,723 49 95 11,677
FHLMC 6,562 26 41 6,547
GNMA 2,418 84 2,502
SBA 765 17 782
------- ------ ------ -------
Total mortgage-backed
securities 21,468 176 136 21,508
Mutual Fund 6,005 130 22 6,113
Marketable equity securities 6,719 8,664 15,383
------- ------ ------ -------
Total securities available
for sale $ 169,373 $ 9,516 $ 209 $ 178,680
======= ====== ====== =======
Securities held to maturity
At December 31, 1996
US Government agency
obligations $ 67,711 $ 109 $ 504 $ 67,316
Mortgage-backed securities:
FNMA 7,030 32 141 6,921
FHLMC 1,000 99 901
GNMA 7,227 112 113 7,226
SBA 1,011 11 7 1,015
Other 424 11 413
------- ------ ------ -------
Total mortgage-backed
securities 16,692 155 371 16,476
------- ------ ------ -------
Total securities held
to maturity $ 84,403 $ 264 $ 875 $ 83,792
======= ====== ====== =======
<PAGE> 13
Securities available for sale
At December 31, 1996
US Treasury obligations $ 25,847 $ 26 $ 21 $ 25,852
US Government agency
obligations 65,748 21 424 65,345
Other corporate obligations 6,475 39 6,436
Mortgage-backed securities:
FNMA 33,284 59 233 33,110
FHLMC 32,402 39 260 32,181
GNMA 3,577 1 69 3,509
------- ------ ------ -------
Total mortgage-backed
securities 69,263 99 562 68,800
Mutual Fund 5,439 11 27 5,423
Marketable equity securities 7,282 3,329 5 10,606
------- ------ ------ -------
Total securities available
for sale $ 180,054 $ 3,486 $ 1,078 $ 182,462
======= ====== ====== =======
Securities held to maturity
At December 31, 1995
US Government agency
obligations $ 28,704 $ 289 $ 159 $ 28,834
Mortgage-backed securities:
FNMA 4,643 9 44 4,608
FHLMC 1,000 99 901
GNMA 9,102 41 130 9,013
SBA 1,317 53 7 1,363
Other 621 11 610
------- ------ ------ -------
Total mortgage-backed
securities 16,683 103 291 16,495
------- ------ ------ -------
Total securities held
to maturity $ 45,387 $ 392 $ 450 $ 45,329
======= ====== ====== =======
Securities available for sale
At December 31, 1995
US Treasury obligations $ 62,037 $ 467 $ 16 $ 62,488
US Government agency
obligations 46,579 126 325 46,380
Other corporate obligations 11,491 9 67 11,433
Mortgage-backed securities:
FNMA 15,215 225 107 15,333
FHLMC 14,680 164 86 14,758
GNMA 4,119 166 4,285
SBA 553 4 557
Other 99 3 102
------- ------ ------ -------
Total mortgage-backed
securities 34,666 562 193 35,035
Mutual Fund 3,523 22 27 3,518
Marketable equity securities 4,291 2,148 9 6,430
------- ------ ------ -------
Total securities available
for sale $ 162,587 $ 3,334 $ 637 $ 165,284
======= ====== ====== =======
</TABLE>
As a member of the Federal Home Loan Bank (FHLB) of Boston, the Bank is
required to invest in $100 par value stock of the FHLB of Boston in the
amount of 1% of its outstanding loans secured by
<PAGE> 14
residential housing, or 1% of 30% of total assets, or 5% of its outstanding
advances from the FHLB of Boston, whichever is higher. When such stock is
redeemed, the Bank would receive from the FHLB of Boston an amount equal
to the par value of the stock. As of December 31, 1997, 1996 and
1995, the Company had investments in FHLB of Boston stock of $7,201,000,
$6,365,000, and $7,558,000 respectively. At December 31, 1997 the weighted
average yield on FHLB of Boston stock was 6.50%.
The following table sets forth the maturity distribution of
securities held to maturity and securities available for sale at
December 31, 1997 and the weighted average yields of such securities
(calculated on the basis of the cost and effective yields weighted for
the scheduled maturity of each security).
<TABLE>
<CAPTION>
Amortized Weighted
Cost Average Yield
---------- --------------
(In Thousands)
<S> <C> <C>
US Treasury obligations
Due within 1 year $ 0 0.00%
Due after 1 but within 5 years 82,470 5.97%
------
Total 82,470 5.97%
------
US Government Agency obligations
Due within 1 year 0 0.00%
Due after 1 but within 5 years 43,743 6.45%
Due after 5 but within 10 years 34,385 6.94%
------
Total 78,128 6.67%
------
Other corporate obligations
Due within 1 year 6,508 5.88%
Due after 1 but within 5 years 1,985 6.57%
------
Total 8,493 6.04%
------
Mortgage-backed securities
Due within 1 year 0 0.00%
Due after 1 but within 5 years 274 8.06%
Due after 5 but within 10 years 1,639 6.90%
Due after 10 years 19,555 6.79%
------
Total 21,468 6.81%
------
Total debt securities 190,559 6.35%
Mututal fund shares* 6,005 5.78%
Marketable equity securities* 6,719 4.96%
Net unrealized gains on
securities available for sale 9,307
-------
Total securities held to maturity
and securities available for sale $212,590 6.28%
========
</TABLE>
Included in total debt securities above are U.S. Government Agency
obligations classified as securities held to maturity, with an amortized
cost of $33,910,000, of which $4,500,000, are due after one year, but
within five years with a weighted average yield of 6.50% and $29,410,000
which are due after five years,
<PAGE> 15
but within ten years with a weighted average yield of 7.01%. All other debt
securities are classified as securities available for sale.
*Mutual fund shares and marketable equity securities have no stated
maturity, and are therefore considered to be due after 10 years.
The Company owned one security included in securities available for
sale of an individual issuer, with a book value in excess of 10% of
stockholders' equity, excluding U.S. Treasury and U.S. Government agency
obligations, at December 31, 1997. The Company owned 256,315 shares of
CFX Corporation with an amortized cost of $1,398,600 and a book value
and estimated market value of $7,849,652.
(D) Loan Portfolio
The following table shows Granite State's loan distribution as of
December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
( In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial
& agricultural $ 68,513 $ 63,543 $ 72,657 $ 59,505 $ 50,582
Real estate-residential 245,577 200,983 189,513 196,670 214,606
Real estate-commercial 151,474 139,400 124,319 106,835 95,300
Real estate-construction
and land development 6,000 5,355 3,318 6,768 5,414
Installment 11,588 12,076 12,195 14,741 13,436
Other 26,013 20,940 24,484 26,233 26,591
-------- -------- -------- -------- --------
Total Loans 509,165 442,297 426,486 410,752 405,929
Less:
Allowance for possible
Loan losses (7,651) (6,253) (7,151) (7,080) (6,950)
Unearned income (1,432) (1,860) (2,356) (2,930) (3,429)
-------- -------- -------- -------- --------
Net loans $ 500,082 $ 434,184 $ 416,979 $ 400,742 $ 395,550
======== ======== ======== ======== ========
</TABLE>
(E) Maturity of Loans
The following table shows the maturity/repricing distribution of
loans outstanding, excluding non-accrual loans of $7,145,000 as of
December 31, 1997. Fixed rate loans are entered by remaining maturity
and reflect scheduled loan amortization while adjustable rate loans are
included by repricing frequency.
<TABLE>
<CAPTION>
One Year Over One Year Over
or Less to Five Years Five Years Total
--------- --------------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 46,273 $ 13,216 $ 8,068 $ 67,557
Real estate-residential 114,595 85,336 44,157 244,088
Real estate-commercial 89,706 41,498 16,009 147,213
Real estate-construction
and land development 2,515 1,073 2,320 5,908
Installment 6,473 4,782 99 11,354
Other 25,065 535 300 25,900
-------- ------- ------- --------
$ 284,627 $ 146,440 $ 70,953 $ 502,020
Loans maturing after ======== ======= ======= ========
one year:
Fixed interest rate $ 40,345 $ 55,634 $ 95,979
Variable interest rate 106,095 15,319 121,414
-------- ------- --------
$ 146,440 $ 70,953 $ 217,393
======== ======= ========
</TABLE>
<PAGE> 16
(F) Nonperforming Loans and Assets
The following table summarizes Granite State's nonperforming loans
and assets at December 31. Amounts shown reflect principal only.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming Loans:
Commercial, financial
and agricultural $ 956 $ 204 $ 670 $ 733 $ 611
Real estate-residential 1,489 2,707 4,231 2,648 2,737
Real estate-commercial 4,261 1,032 2,106 2,656 3,799
Real estate-construction
and land development 92 102 444 298 177
Installment and other 347 41 256 292 180
------ ------ ------ ------ ------
Total nonperforming loans 7,145 4,086 7,707 6,627 7,504
Other real estate owned 1,905 3,492 4,779 7,464 9,609
------ ------ ------- ------- ------
Total nonperforming loans
and other real estate owned $ 9,050 $ 7,578 $ 12,486 $ 14,091 $ 17,113
====== ====== ======= ======= =======
Percentage of nonperforming
loans and other real estate
owned to total loans receivable 1.78% 1.71% 2.93% 3.43% 4.22%
====== ====== ====== ====== ======
Percentage of nonperforming loans
and other real estate owned
to total assets 1.11% 0.95% 1.71% 2.11% 2.69%
====== ====== ====== ====== ======
Loans delinquent 90 days or
more still accruing,
not included in above $ 535 $ 93 $ 0 $ 21 $ 0
====== ====== ====== ====== ======
</TABLE>
Accrual of interest on loans is discontinued either when reasonable
doubt exists as to the full, timely collection of interest or principal,
or when a loan becomes contractually past due by ninety days unless the
loan is well secured and in the process of collection. When a loan is
placed on nonaccrual status, all interest previously accrued and not
received is reversed against current period earnings.
For the year ended December 31, 1997, the gross interest income on
nonperforming loans that would have been recorded, had such loans been
current in accordance with their original terms amounted to $767,000.
The amount of interest income on those loans included in net earnings
for the year ended December 31, 1997 amounted to $413,000.
<PAGE> 17
The Company has identified loans as impaired in accordance with SFAS
No. 114, when it is probable that interest and principal will not be
collected according to the terms of the loan agreements. The balance of
impaired loans was $4,559,000, $2,712,000 and $5,122,000 at December 31,
1997, 1996 and 1995, respectively. The allowance for possible loan
losses associated with impaired loans allocated from and part of the
general allowance for possible loan losses, upon the adoption of SFAS
No. 114, on January 1, 1995 was $1,277,000. During 1997, 1996 and 1995,
provisions to the allowance for impaired loans amounted to $983,000,
$499,000 and $1,225,000, respectively and impaired loans charged-off
amounted to $386,000, $1,156,000 and $1,388,000, respectively. The
allowance for possible loan losses associated with impaired loans at
December 31, 1997, 1996 and 1995 was $1,054,000, $457,000 and
$1,114,000, respectively. At December 31, 1997, 1996 and 1995, there
were no impaired loans which did not have an allowance for possible loan
losses determined in accordance with SFAS No. 114. The average recorded
investment in impaired loans was $3,001,000, $3,933,000 and $5,782,000,
respectively in 1997, 1996 and 1995 and the income recognized on
impaired loans during 1997, 1996 and 1995 was $0, $4,000 and $19,000,
respectively. Total cash collected on impaired loans during 1997, 1996
and 1995 was $779,000, $2,427,000 and $484,000, respectively, of which
$779,000, $2,423,000 and $465,000, respectively, was credited to the
principal balance outstanding on such loans. The Company's policy for
interest income recognition on impaired loans is to recognize income on
nonaccrual loans under the cash basis when the loans are both current
and the collateral on the loan is sufficient to cover the outstanding
obligation to the Company; if these factors do not exist, the Company
does not recognize income.
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure.
Real estate formally acquired in settlement of loans is recorded at the
lower of the carrying value of the loan or the fair value of the
property received less an allowance for estimated costs to sell. Loan
losses arising from the acquisition of such properties are charged
against the allowance for possible loan losses. Provisions to reduce
the carrying value to net realizable value are charged to current period
earnings as realized and reflected as an addition to the valuation
allowance. Operating expenses and gains and losses upon disposition are
reflected in earnings as realized.
Other real estate owned at December 31 was comprised as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Condominiums and apartment
projects $ 371 $ 780 $ 1,124 $ 1,797 $ 1,040
Single family housing
projects 792 1,281 1,367 2,107 2,788
Retail and office 83 1,272 1,477 889
Non-retail commercial 773 798 1,996 1,482 2,336
Residential 437 1,078 625 1,192 3,015
------ ------- ------- ------- -------
2,373 4,020 6,384 8,055 10,068
Less: Valuation allowance 468 528 1,605 591 459
------ ------- ------- ------- -------
$ 1,905 $ 3,492 $ 4,779 $ 7,464 $ 9,609
====== ======= ======= ======= =======
</TABLE>
As of December 31, 1997, there were no loan concentrations exceeding
10% of total loans.
As of December 31, 1997, neither Granite State nor its subsidiary,
Granite Bank, had any foreign loans.
<PAGE> 18
(G) Summary of Loan Loss Experience and Allocation
of the Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained through
provisions for possible loan losses based upon management's ongoing
evaluation of the risks inherent in the loan portfolio. Management's
evaluation of the loan portfolio includes many factors, such as
identification and review of individual problem situations that may
affect the borrower's ability to repay; review of overall portfolio
quality through an analysis of current charge-offs, delinquency, and
nonperforming loan data; review of regulatory authority examinations and
evaluations of loans; an assessment of current and expected economic
conditions; and changes in the size and character of the loan portfolio.
At December 31, 1994 and 1995, the level of the allowance was higher
than the 1993 level due to increases in the balances of the loan
portfolio. At December 31, 1996, the level of the allowance was lower
than the level of the allowance at December 31, 1995 due primarily to a
reduction in the level of nonperforming loans. At December 31, 1997,
the level of the allowance was higher than the 1996 level, due to
increases in nonperforming loans and the loan portfolio and based on
management's overall evaluation of the adequacy of the allowance in
relation to nonperforming loans, total loans and the risks inherent in
the loan portfolio. While management believes that the allowance for
possible loan losses at December 31, 1997 is adequate based on its
current review and estimates, further provisions to the allowance may be
necessary if the market in which the Company operates deteriorates.
Additionally, regulatory agencies review the Company's allowance for
loan losses as part of their examination process. Such agencies may
require the Company to recognize additions to the allowance based upon
judgments which may be different from those of management.
Changes in the allowance for possible loan losses for the year ended
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 6,253 $ 7,151 $ 7,080 $ 6,950 $ 7,070
Provision for possible
loan losses 2,425 1,372 3,337 1,032 1,825
Loans charged off (1,205) (3,020) (3,573) (1,346) (2,189)
Recoveries of loans previously
charged off 178 750 307 444 244
------ ------ ------ ------ ------
Balance at end of year $ 7,651 $ 6,253 $ 7,151 $ 7,080 $ 6,950
====== ====== ====== ====== ======
</TABLE>
A summary of loan charge-offs by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 356 $ 684 $ 1,085 $ 362 $ 685
Real estate-residential 613 918 606 303 487
Real estate-commercial 150 907 1,736 409 796
Real estate-construction
and land development 19 78 0 0 0
Installment and other loans 67 433 146 272 221
----- ----- ------ ----- -----
$ 1,205 $ 3,020 $ 3,573 $ 1,346 $ 2,189
===== ===== ====== ===== =====
</TABLE>
A summary of loan recoveries by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 35 $ 460 $ 67 $ 163 $ 115
Real estate-residential 64 60 110 62 51
Real estate-commercial 56 105 76 201 52
Real estate-construction
and land development 1 57 38 0 0
Installment and other loans 22 68 16 18 26
----- ----- ----- ----- -----
$ 178 $ 750 $ 307 $ 444 $ 244
===== ===== ===== ===== =====
</TABLE>
<PAGE> 19
The ratio of net loan charge offs to average loans outstanding for
the year ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Net loan chargeoffs $ 1,027 $ 2,270 $ 3,266 $ 902 $ 1,945
========= ========= ========= ========= =========
Average loans outstanding $ 474,844 $ 423,421 $ 419,533 $ 411,165 $ 402,308
========= ========= ========= ========= =========
Ratio of net loan chargeoffs
to average loans outstanding 0.22% 0.54% 0.78% 0.22% 0.48%
========= ========= ========= ========= =========
</TABLE>
An allocation of the allowance for possible loan losses as of
December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
------ ---------------- ------ ---------------- ------ ----------------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 1,030 13.46% $ 898 14.37% $ 1,218 17.04%
Real estate-residential 3,690 48.23% 2,841 45.44% 3,178 44.43%
Real estate-commercial 2,276 29.75% 1,971 31.52% 2,084 29.15%
Real estate-construction
and land development 90 1.18% 76 1.21% 56 0.78%
Installment and other loans 565 7.38% 467 7.46% 615 8.60%
------ ------- ------ ------- ------ -------
$ 7,651 100.00% $ 6,253 100.00% $ 7,151 100.00%
====== ======= ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
1994 1993
------------------------ ------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
------ ---------------- ------ ----------------
($ In Thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 1,026 14.49% $ 866 12.46%
Real estate-residential 3,390 47.88% 3,674 52.87%
Real estate-commercial 1,841 26.01% 1,632 23.48%
Real estate-construction
and land development 117 1.65% 93 1.33%
Installment and other loans 706 9.97% 685 9.86%
------ ------- ------ -------
$ 7,080 100.00% $ 6,950 100.00%
====== ======= ====== =======
</TABLE>
The allowance for possible loan losses as a percentage of loans
outstanding at December 31 of each reported period is as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Allowance for possible
loan losses as a percentage
of total loans outstanding 1.50% 1.41% 1.68% 1.72% 1.71%
====== ====== ====== ====== ======
</TABLE>
<PAGE> 20
(H) Risks Associated with Commercial Real Estate, Commercial
and Construction Loans
Commercial real estate and commercial lending involves significant
additional risks compared with one-to-four family residential mortgage
lending, and therefore typically accounts for a disproportionate share
of delinquent loans and real estate owned through foreclosure or by deed
in lieu of foreclosure. Such lending generally involves larger loan
balances to single borrowers or groups of related borrowers than does
residential lending, and repayment of the loan depends in part on the
underlying business and financial condition of the borrower and is more
susceptible to adverse future developments. If the cash flow from
income-producing property is reduced, for example, because leases are
not obtained or renewed, the borrower's ability to repay the loan may be
materially impaired. These risks can be significantly affected by
considerations of supply and demand in the market for office,
manufacturing and retail space and by general economic conditions. As a
result, commercial real estate and commercial loans are likely to be
subject, to a greater extent than residential real estate loans, to
adverse conditions in the general economy.
Construction loans are, in general, subject to the same risks as
commercial real estate loans, but involve additional risks as well.
Such additional risks are due to uncertainties inherent in estimating
construction costs, delays arising from labor problems, shortages of
material, uncertain marketability of a complete project and other
unpredictable contingencies that make it relatively difficult to
determine accurately the total loan funds required to complete a project
or the value of the completed project. Construction loan funds are
advanced on the security of the project under construction, which is of
uncertain value prior to the completion of construction. This
uncertainty is increased in depressed real estate markets. When a
construction project encounters cost overruns, marketing or other
problems, it may become necessary, in order to sustain the project and
preserve collateral values, for the lender to advance additional funds
and to extend the maturity of its loan. In a declining market, there is
no assurance that this strategy will successfully enable the lender to
recover outstanding loan amounts and interest due. Moreover,
foreclosing on such properties results in administrative expense and
substantial delays in recovery of outstanding loan amounts and provides
no assurance that the lender will recover all monies due to it, either
by developing the property, subject to regulatory limitations and to the
attendant risks of development, or by selling the property to another
developer.
(I) Deposits
The average balance of deposits and the average rates paid thereon
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- -------- -------- ------- -------- -------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits:
Interest bearing NOW deposits $ 158,374 2.64% $ 141,311 2.63% $ 107,905 2.44%
Money market deposits 34,628 2.67% 40,232 2.72% 56,579 2.84%
Savings deposits 90,510 2.57% 92,593 2.58% 107,034 2.77%
Time deposits 283,514 5.61% 262,165 5.64% 233,583 5.52%
-------- -------- --------
Total interest bearing deposits $ 567,026 4.11% $ 536,301 4.10% $ 505,101 3.98%
======== ====== ======== ====== ======== ======
Noninterest bearing deposits $ 63,870 N/A $ 58,935 N/A $ 53,132 N/A
======== ======== ========
</TABLE>
<PAGE> 21
(J) Maturities of Time Deposits
The maturity distribution of time certificates of deposit of $100,000
or more at December 31, 1997 follows:
<TABLE>
<CAPTION>
REMAINING MATURITY BALANCE
------------------ ------------
(In Thousands)
<S> <C>
3 months or less $ 10,551
Over 3 through 6 months 11,687
Over 6 through 12 months 8,434
Over 12 through 36 months 5,348
Over 36 months 1,340
-------
$ 37,360
=======
</TABLE>
(K) Return on Equity and Assets
Operating and capital ratios for the year ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net earnings to average assets 0.29% 0.95% 0.35%
Net earnings to average
stockholders' equity 3.57% 12.88% 4.56%
Dividend pay out ratio on common stock - basic 69.05% 14.81% 39.13%
- diluted 72.50% 15.63% 40.91%
Average equity to average total assets 8.02% 7.40% 7.76%
</TABLE>
(L) Borrowings
Information regarding borrowings in Note L to the consolidated
Financial Statements in the Annual Report to Stockholders for the year
ended December 31, 1997 is incorporated herein by reference.
Short-Term Borrowings
- ---------------------
Outstanding short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase $ 66,025 $ 64,961 $ 49,958
======= ======= =======
Short-term fixed rate borrowings $ 25,269 $ 42,221 $ 25,205
======= ======= =======
</TABLE>
<PAGE> 22
The maximum amount of securities sold under agreements to repurchase
and short-term fixed rate borrowings outstanding at any month end during
the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase $ 67,693 $ 64,961 $ 53,373
======= ======= =======
Short-term fixed rate borrowings $ 74,918 $ 53,303 $ 41,928
======= ======= =======
</TABLE>
The average balance of securities sold under agreements to repurchase
and short-term fixed rate borrowings and weighted average interest rates
thereon for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
Average Weighted Average Weighted Average Weighted
Balance Average Rate Balance Average Rate Balance Average Rate
-------- ------------ -------- ------------ -------- ------------
($ in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities sold under
agreements to repurchase $ 59,826 4.76% $ 51,220 4.76% $ 41,250 5.25%
======= ====== ======= ====== ======= ======
Short-term fixed rate borrowings $ 33,043 5.70% $ 33,229 5.78% $ 30,921 6.25%
======= ====== ======= ====== ======= ======
</TABLE>
(M) Competition
The Bank continues to experience substantial competition in
attracting and retaining deposit accounts and in making mortgage and
other loans. There are numerous federally-insured banks and thrifts
with offices within Granite Bank's principal market areas, many of which
are headquartered there. In addition, the Bank experiences competition
from credit unions and other financial intermediaries which are not
subject to similar State and Federal regulations.
The primary factors in competing for deposit accounts are service,
interest rates, convenience and, to a lesser extent, products offered.
Competitors for deposit accounts include other depository institutions
and other investment vehicles such as mutual funds, government and
corporation obligations, and the equity capital markets.
The primary factors in competing for loans are interest rates, loan
origination fees and the quality and range of lending products and
services offered. Competition for origination of loans comes primarily
from savings institutions, mortgage banking firms, and other commercial
banks.
(N) Subsidiaries
Granite State owns 100% of the capital stock of Granite Bank, a New
Hampshire chartered commercial bank, its sole subsidiary.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
Not applicable.
<PAGE> 23
Item 2. Properties
The following table sets forth the location of the Company's offices
as of December 31, 1997. See also Notes H and M to the Consolidated
Financial Statements in the Annual Report to Stockholders for the year
ended December 31, 1997 which are incorporated herein by reference.
<TABLE>
<CAPTION>
Office Type Location City/Town Status
- -------------- -------------------------- ------------ ---------
<S> <C> <C> <C>
Full service 122 West Street Keene Owned*
(Headquarters)
Full service Routes 9 and 63 Chesterfield Owned*
Full service Elm Street at Route 101 Milford Owned*
Full service Lorden Plaza Milford Leased*
Full service Route 101A & 122 Amherst Owned*
Full service 21 Grove Street Peterborough Owned*
Full service Jct Route 101 & 202 Peterborough Leased*
Full service 35 Main Street Peterborough Owned*
Full service Route 101 Peterborough Plaza Peterborough Leased*
Full service 70 Main Street Durham Owned*
Full service Southgate Plaza, Route 1 Portsmouth Owned*
Full service 93 Middle Street Portsmouth Owned*
Full service 9 Childs' Way and Route 9 Hillsborough Owned*
Full service Lancotot's Shopping Center Weare Owned*
Route 114
Full service 62 Peterborough Street Jaffrey Owned*
Full service 167 Main Street Antrim Owned*
Full service 197 Loudon Road Concord Leased*
Full service 66 No. Main Street Concord Leased*
Full service Pennichuck Square Merrimack Leased*
Full service 146 Main Street Nashua Leased*
</TABLE>
Additionally, the Company operates twenty ATMs at other locations in
Keene, Fitzwilliam, Milford, Amherst, Durham, West Swanzey, North
Swanzey, Peterborough, Hillsborough, Concord, Dublin and Greenfield, New
Hampshire. The ATM facilities and their enclosures are owned by the
Company; the property on which they are located is leased. All offices
and ATM facilities are located in New Hampshire.
*Office includes an ATM facility. The Durham branch has two ATM
facilities on site.
Item 3. Legal Proceedings
The Company is a defendant in various legal actions incident to its
business, none of which is believed by management to be material to the
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE> 24
Additional Item. Executive Officers
Information regarding executive officers not listed as directors in
the Proxy Statement is as follows:
Charles B. Paquette (age 45) is the Executive Vice President,
Secretary and Chief Operations Officer of Granite State and Senior
Executive Vice President, Secretary and Chief Operations Officer of
Granite Bank, positions he assumed in 1986 and 1991, respectively. Mr.
Paquette has been employed in a management position by the Company and
Granite Bank since 1980.
William C. Henson (age 42) is the Executive Vice President of Granite
State and Director of Community Banking of Granite Bank, positions he
assumed in 1986 and 1997, respectively. Mr. Henson joined the Bank in
1980, and has since served in a management capacity.
William G. Pike (age 46) is the Executive Vice President and Chief
Financial Officer of Granite State and Granite Bank, positions he
assumed in December 1991 when he joined the Company.
<PAGE> 25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
Granite State's common stock is quoted on the NASDAQ Stock Market
under the symbol GSBI. The following table shows the range of the high
and low prices and dividend information on a quarterly basis for Granite
State's common stock for 1997 and 1996. The stock prices shown below
have been adjusted to reflect the Company's three-for-two stock split
effected in the form of a 50% stock dividend paid May 9, 1997 to
stockholders of record April 25, 1997. Dividends declared per share
shown below have been adjusted to reflect the stock split mentioned
above, as well as the impact of the acquisition of Primary Bank which
was accounted for as a pooling-of-interests effective after the close of
business October 31, 1997. The table does not reflect inter-dealer
prices, potential mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1997
-----------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Dividends declared per share.................. $ .11 $ .06 $ .06 $ .06
Stock Price
High ........................................ 27.00 21.50 19.00 17.67
Low.......................................... 21.25 18.75 16.16 14.50
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Dividends declared per share.................. $ .05 $ .05 $ .05 $ .05
Stock Price
High ........................................ 15.17 12.50 12.50 12.00
Low.......................................... 12.42 12.00 11.59 10.75
</TABLE>
(b) Holders
As of March 19, 1998, Granite State had approximately 1,388 common
shareholders.
(c) Dividends
The holders of common stock of Granite State are entitled to receive
and share pro-rata in such dividends as may be declared by the Board of
Directors of Granite State out of funds legally available therefore.
Granite State is permitted by New Hampshire corporate law to pay
dividends out of unreserved and unrestricted earned surplus or from
unreserved and unrestricted net earnings of a current fiscal year and
the next preceding fiscal year taken as a single period, as and when
declared by its Board of Directors.
New Hampshire banking regulations prohibit the payment of a cash
dividend if the effect thereof would cause the net worth of the Bank to
be reduced below either the amount required for its liquidation account
or applicable capital requirements. The liquidation account was
established in connection with Granite Bank's and Primary Bank's
conversions from mutual to a stock savings bank ("conversions") for the
benefit of certain depositors in the event of a liquidation of the Bank.
The initial amount of the
<PAGE> 26
liquidation account, as originally established, equaled the Banks' net worth
of $15,803,000 at the respective dates of conversion and has since been
declining as deposits have been reduced or withdrawn (it will never be
increased, despite additional deposits). The balance of the liquidation
account at December 31, 1997 was approximately $2,379,000. The Federal
Deposit Insurance Act prohibits the Bank from making a capital distribution,
including payment of a cash dividend, if the Bank would not meet applicable
capital requirements after the payment.
Furthermore, the Federal Deposit Insurance Act prohibits the Bank from
paying dividends on its capital stock if it is in default in the payment of
any assessment to the FDIC.
Item 6. Selected Financial Data
Selected Financial Data on page 60 of the Annual Report to
Stockholders for the year ended December 31, 1997 is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 11 to 27, inclusive, of the Annual Report
to Stockholders for the year ended December 31, 1997 is incorporated
herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk on pages 15
to 18 inclusive, of the Annual Report to Stockholders for the year ended
December 31, 1997 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements Required by Regulation S-X
Information relating to financial statements on pages 29 to 57,
inclusive, of the Annual Report to Stockholders for the year ended
December 31, 1997 is incorporated herein by reference.
(b) Supplementary Financial Information
(1) Selected Quarterly Financial Data
The Selected Quarterly Financial Data on pages 58 to 59 of the Annual
Report to Stockholders for the year ended December 31, 1997 is
incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Management's discussion of the effects of inflation on page 26 of the
Annual Report to Stockholders for the year ended December 31, 1997 is
incorporated herein by reference.
(3) Information About Oil and Gas Producing Activities
Not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE> 27
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of Granite
State on pages 3 to 4 of the Proxy Statement for the 1998 Annual Meeting
of Stockholders is incorporated herein by reference.
Item 11. Executive Compensation
Information regarding executive compensation on pages 5 to 10 of the
Proxy Statement for the 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of certain beneficial owners
and Granite State's management on pages 2 to 4 of the Proxy Statement
for the 1998 Annual Meeting of Stockholders is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions
on page 10 of the Proxy Statement for the 1998 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Documents Filed as Part of this Report
(1) Financial Statements
The financial statements listed below and the report of independent
certified public accountants are incorporated herein by reference to the
Annual Report to Stockholders for the year ended December 31, 1997, in
Item 8. Page references are to such Annual Report.
Financial Statements Page Reference
-------------------- --------------
Granite State Bankshares, Inc. and Subsidiary
Report of Independent Certified Public Accountants 29
Consolidated Statements of Financial Condition 30
Consolidated Statements of Earnings 31
Consolidated Statements of Stockholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34 - 57
(2) Financial Statements Schedules
Schedules of the Consolidated Financial Statements required by the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
<PAGE> 28
The remaining information appearing in the Annual Report to
Stockholders for the year ended December 31, 1997, is not deemed to be
filed as part of this report, except as expressly provided herein.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed below are filed herewith or are incorporated by
reference to other filings.
Exhibit Index to Form 10-K
<TABLE>
<S> <C>
Exhibit 2 Agreement and Plan of Reorganization by
and among Granite State, Granite Bank and
Primary Bank, as amended, dated as of
April 29, 1997 and the Agreement and Plan
of Merger among Granite Bank and Primary
Bank and joined in by Granite State <F*>
Exhibit 3.1 Articles of Incorporation <F**>
Exhibit 3.2 Bylaws <F***>
Exhibit 10.1 Stock Option Plan <F**>
Exhibit 10.2 Employment Agreement with
Charles W. Smith <F**>
Exhibit 10.3 Amendment No. 1 to Employment Agreement
with Charles W. Smith <F***>
Exhibit 10.4 Form of Special Termination Agreement
with Messrs. Charles B. Paquette,
William C. Henson, William G. Pike and
William D. Elliott <F***>
Exhibit 10.5 Employee Stock Ownership Plan <F**>
Exhibit 10.6 Employment Agreement with
Christopher J. Flynn
Exhibit 10.7 1997 Granite State Bankshares, Inc.
Long-Term Incentive Stock Benefit
Plan <F****>
Exhibit 10.8 Restated Executive Supplemental Retirement
Income Agreement for Charles W. Smith
Exhibit 11 Calculations of Basic Earnings Per Share
and Diluted Earnings Per Share
Exhibit 13 Portions of the Annual Report to
Stockholders for the year ended
December 31, 1997
Exhibit 21 Subsidiary of Granite State Bankshares,
Inc. <F*****>
Exhibit 23.1 Consent of Independent Certified Public
Accountant-Grant Thornton LLP
Exhibit 23.2 Consent of Independent Certified Public
Accountant-KPMG Peat Marwick LLP
Exhibit 27.1 Financial Data Schedule-Fiscal Year End 1997
<PAGE> 29
Exhibit 27.2 Restated Financial Data Schedule-Fiscal
Year Ends 1995, 1996, and Qtrs. 1,2,3
of 1996
Exhibit 27.3 Restated Financial Data Schedule- Qtrs.
1,2,3 of 1997
Exhibit 99 Independent Auditor's Report of Primary Bank
<FN>
<F*> Incorporated by reference from Appendix A to the Granite
State Bankshares, Inc., and Primary Bank Joint Proxy Statement
dated August 8, 1997.
<F**> Incorporated by reference from Granite State Bankshares, Inc.,
Form S-1, filed on April 18, 1986.
<F***> Incorporated by reference from Granite State Bankshares, Inc.,
Form 10-KSB, Exhibit 3.2, Exhibit 10.3, and Exhibit 10.4 filed
on March 27, 1997.
<F****> Incorporated by reference from Appendix A to the Proxy Statement
for the 1998 Annual Meeting of Stockholders.
<F*****> See Part I, Item 1(a) and Item 1 (c)(5)(N) of Form 10-K.
</FN>
</TABLE>
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Granite State Bankshares, Inc., the
registrant, has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GRANITE STATE BANKSHARES, INC.
/s/ Charles W. Smith
-----------------------
Dated : March 27, 1998 By: Charles W. Smith
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934 this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ Charles W. Smith
- -------------------- 3/27/98 Chief Executive Officer
Charles W. Smith (Principal Executive Officer)
and Chairman of the Board
/s/ William G. Pike 3/27/98 Executive Vice President
- -------------------- and Chief Financial Officer
William G. Pike (Principal Financial and
Accounting Officer)
/s/ Dr.David M.Bartley 3/27/98 Director
- ----------------------
Dr.David M.Bartley
/s/ Christopher J. Flynn 3/27/98 Director
- -------------------------
Christopher J. Flynn
- ------------------- 3/27/98 Director
Philip M. Hamblet
/s/ David J. Houston 3/27/98 Director
- ---------------------
David J. Houston
<PAGE> 31
/s/ James L. Koontz 3/27/98 Director
- --------------------
James L. Koontz
/s/ Forrest McKerley 3/27/98 Director
- ---------------------
Forrest McKerley
/s/ Jane B. Reynolds 3/27/98 Director
- ---------------------
Jane B. Reynolds
/s/ William Smedley V 3/27/98 Director
- ----------------------
William Smedley V
/s/ C. Robertson Trowbridge 3/27/98 Director
- ----------------------------
C. Robertson Trowbridge
/s/ James C. Wirths III 3/27/98 Director
- ------------------------
James C. Wirths III
<PAGE> 32
EXHIBIT 10.6
EMPLOYMENT AGREEMENT WITH CHRISTOPHER J. FLYNN
GRANITE BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the 31st day of October,
1997 by and between Granite Bank, a New Hampshire bank (the "Bank"),
with its principal administrative office at 122 West Street, Keene, New
Hampshire 03431-0627, and Christopher J. Flynn (the "Executive"). Any
reference to "Company" herein shall mean Granite State Bankshares, Inc.,
the stock holding company parent of the Bank or any successor thereto.
WHEREAS, the Bank and Company entered into an Agreement and Plan
of Reorganization (the "Merger Agreement") with Primary Bank on April
29, 1997; and
WHEREAS, Executive is willing to forego payment under the
Employment Agreement currently in effect by and between Primary Bank and
Executive as a result of the Merger Agreement; and
WHEREAS, the Bank wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided,
the parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as President of the Bank. The Executive shall render
administrative and management services to the Bank such as are
customarily performed by persons in a similar executive capacity.
During said period, Executive also agrees to serve, if elected, as an
officer and director of any subsidiary or affiliate of the Bank.
Pursuant to the Merger Agreement, and as of the date hereof, Executive
shall be elected to the Board of Directors of the Bank and the Company.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement
shall begin as of the date first above written and shall continue for a
period of thirty-six (36) full calendar months thereafter. During said
term the Executive shall perform the normal and customary duties
associated with the position of President. The board of directors of
the Bank ("Board") will review the Agreement and the Executive's
performance annually for the purpose of determining whether to extend
the Agreement and, unless the Board determines that there exists some
basis not to extend this Agreement, this Agreement shall be extended for
an additional year, so that the remaining term shall be thirty-six (36)
months. Nothing in this provision shall be interpreted as restricting
the Bank's right to remove Executive for Cause in accordance with
Section 7 of this Agreement, or to remove Executive for any reason and
pay Executive the benefits set forth in Section 4 or 5, as applicable.
(b) During the period of his employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods,
and reasonable leaves of absence, Executive shall devote substantially
all his business time, attention, skill, and efforts to the faithful
performance of his duties hereunder including activities and services
related to the organization, operation and management of the Bank;
provided, however, that, with the approval of the Board, as evidenced by
a resolution of such Board, from time to time, Executive may serve, or
continue to serve, on the boards of directors of, and hold any other
offices or positions in, business companies or business organizations,
which, in such Board's judgment, will not present any conflict of
interest with the Bank, or materially affect the performance of
Executive's duties pursuant to this Agreement (it being understood that
membership in social, religious, charitable, educational, or similar
organizations does not require Board approval pursuant to this Section
2(b)).
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall
constitute the salary and benefits paid for the duties described in
Section 2(b). The Bank shall pay Executive as compensation a salary of
not less than $205,000 per year ("Base Salary"). Such Base Salary shall
be payable bimonthly. During the period of this Agreement, Executive's
Base Salary shall be reviewed at least annually. Such review shall be
conducted by a Committee designated by the Board, and the Board may
increase, but not decrease, Executive's Base Salary (any increase in
Base Salary shall become the "Base Salary" for purposes of this
Agreement). In addition to the Base Salary provided in this Section
3(a), the Bank shall provide Executive with all such other benefits as
are provided uniformly to full-time officers of the Bank. Base salary
shall include any amounts of compensation deferred by Executive under a
qualified plan maintained by the Bank.
(b) Executive will be entitled to participate in or receive
benefits under any employee benefit plans including but not limited to,
retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plans, medical coverage or any
other employee benefit plan or arrangement made available by the Bank in
the future to its senior executives and key management employees,
subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Executive will
be entitled to incentive compensation and bonuses as provided in any
plan of the Bank in which Executive is eligible to participate. Nothing
paid to the Executive under any such plan or arrangement will be deemed
to be in lieu of other compensation to which the Executive is entitled
under this Agreement. The Bank shall provide Executive with an annual
allowance toward any dues, initiation fees, and/or assessments required
to maintain the Executive as a member of a country club in the Bank's
market area, and shall provide him with the use of a Bank-owned, late
model automobile (as to which the Bank pay, or reimburse Executive for,
all maintenance costs related to usage for business purposes).
(c) In addition to the Base Salary provided for by this Section
3(a), the Bank shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing
his obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to
time determine in accordance with standards set by the Board of
Directors.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to
the terms and conditions stated in Sections 9 and 10.
(a) The provisions of this Section shall apply upon the
occurrence of an Event of Termination (as herein defined) during the
Executive's term of employment under this Agreement. As used in this
Agreement, an "Event of Termination" shall mean and include any one or
more of the following:
(i) the termination by the Bank of Executive's full-time
employment hereunder for any reason other than (A) Disability or
Retirement, as defined in Section 6 hereof, or Death, (B) following a
Change in Control, as defined in Section 5(a) hereof, or (C) Termination
for Cause as defined in Section 7 hereof; or
(ii) Executive's resignation from the Bank's employ, upon any:
(A) failure to elect or reelect or to appoint or
reappoint Executive as President during the term of this
Agreement in accordance with Section 2(a) of this Agreement,
(B) without Executive's written consent, a material change
in Executive's function, duties, or responsibilities, which
change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the
position and attributes thereof described in Section 1,
hereof,
(C) a relocation of Executive's principal place of
employment by more than 50 miles from its location at the
effective date of this Agreement, or a material reduction in
the benefits and perquisites to the Executive from those
being provided as of the effective date of this Agreement,
(D) liquidation or dissolution of the Bank or Company
other than liquidations or dissolutions that are caused by
reorganizations that do not affect the status of Executive,
or
(E) breach of this Agreement by the Bank.
Upon the occurrence of any event described in clauses (ii) (A),
(B), (C), (D) or (E), of this Section 4(a), Executive shall have the
right to elect to terminate his employment under this Agreement by
resignation upon thirty (30) days prior written notice which must be
given by Executive within a reasonable period of time not to exceed four
calendar months after the initial event giving rise to said right to
elect, which shall be deemed to constitute an "Event of Termination."
Other than as set forth in the preceding sentence, the voluntary
resignation of Executive from the Bank shall not constitute an Event of
Termination.
(b) Upon the occurrence of an Event of Termination, on the Date
of Termination, as defined in Section 8, the Bank shall pay Executive,
or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to the Base Salary due for the
remaining term of the Agreement; provided however, that if the Bank is
not in compliance with its minimum capital requirements or if such
payments would cause the Bank's capital to be reduced below its minimum
capital requirements, such payments shall be deferred until such time as
the Bank is in capital compliance. At the election of the Executive,
which election is to be made on an annual basis during the month of
January, and which election is irrevocable for the year in which made
and upon the occurrence of an Event of Termination, any payments shall
be made in a lump sum or paid monthly during the remaining term of this
Agreement following the Executive's termination. In the event that no
election is made, payment to the Executive will be made on a monthly
basis during the remaining term of this Agreement.
(c) Upon the occurrence of an Event of Termination, the Bank, in
its sole discretion, shall cause Executive to be continued under the
Bank's existing employee benefit plans, life, medical, dental and
disability coverage substantially identical to the coverage maintained
by the Bank for Executive prior to his termination, except to the extent
such coverage may be changed in its application to all Bank employees,
or if coverage under the Bank's existing plans is unavailable, the Bank
shall pay the cost of providing Executive with substantially equivalent
covererage. Such coverage shall cease upon the expiration of the
remaining term of this Agreement, or upon the date that Executive
obtains employment.
(d) Upon the occurrence of an Event of Termination, the
Executive will be entitled to receive benefits due him and accrued
pursuant to any retirement, incentive, profit sharing, bonus,
performance, disability or other employee benefit plan maintained by the
Bank.
(e) If it is determined that the Bank has breached the terms of
this Agreement, the only remedy to which Executive is entitled is to
receive the payments and benefits as set forth in this Section 4.
(f) Apart from the right granted to Executive to voluntary
resign as set forth in (a) above, Executive shall have the right upon
thirty (30) days written notice to the Bank to terminate the Agreement
("Voluntary Termination"). Such Voluntary Termination shall not be
deemed to constitute an Event of Termination as defined above; however,
Executive shall be entitled to receive a lump sum payment from the Bank,
upon the effective date of the Voluntary Termination, in an amount equal
to Base Salary.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless
there shall have been a Change in Control of the Bank or Company, as set
forth below. For purposes of this Agreement, a "Change in Control" of
the Bank or Company shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or
(ii) results in a Change in Control of the Bank or the Company within
the meaning of the Change in Bank Control Act and the Rules and
Regulations promulgated by the Federal Deposit Insurance Corporation
("FDIC"), as in effect on the date hereof (provided, that in applying
the definition of change in control as set forth under the rules and
regulations of the FDIC, the Board shall substitute its judgment for
that of the FDIC); or (iii) without limitation such a Change in Control
shall be deemed to have occurred at such time as (a) any "Person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Bank or the
Company representing 20% or more of the Bank's or the Company's
outstanding securities except for any securities of the Bank purchased
by the Bank's employee stock ownership plan and trust; or (b)
individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof,
provided, however, that this sub-section (b) shall not apply if the
Incumbent Board is replaced by the appointment by a Federal banking
agency of a conservator or receiver for the Bank and, provided further
that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least two-thirds of the directors
comprising the Incumbent Board or whose nomination for election by the
Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause
(b), considered as though he were a member of the Incumbent Board; or
(c) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Company in which the
Bank or the Company is not the resulting entity.
(b) If any of the events described in Section 5(a) hereof
constituting a Change in Control have occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), (d) and (e) of this
Section 5 upon his subsequent termination of employment at any time
during the term of this Agreement (regardless of whether such
termination results from his dismissal, his voluntary resignation, or
his resignation at any time during the term of this Agreement following
any demotion, loss of title, office or significant authority or
responsibility, reduction in the annual compensation or benefits or
relocation of his principal place of employment by more than 50 miles
from its location immediately prior to the change in control), unless
such termination is because of his Death, Disability, Retirement or
termination for Cause.
(c) In addition, upon the occurrence of a Change in Control
followed by the Executive's termination of employment, the Bank shall
pay Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to the greater of the payments
due for the remaining term of the Agreement or three (3) times Base
Salary. At the election of the Executive, which election is to be made
on an annual basis during the month of January, and which election is
irrevocable for the year in which made and upon the occurrence of a
Change in Control, such payment may be made in a lump sum or on a pro
rata basis. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of
the Agreement.
(d) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank, in its sole discretion,
shall either (i) contribute the same amount as the Bank contributed
prior to such termination of employment towards the purchase for
Executive of, or (ii) cause to be continued for Executive under the
Bank's existing employee benefit plans, life, medical, dental and
disability insurance coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his termination, except to
the extent that such coverage is changed in its application to all
employees (provided nothing herein shall be deemed to require the Bank
to contribute more towards such coverage than it contributed prior to
such termination of employment). Such coverage and payments shall cease
upon the expiration of thirty-six (36) months.
(e) Notwithstanding the preceding paragraphs of this Section 5,
if payments under this Agreement, together with any other payments
received or to be received by the Executive in connection with a Change
in Control would be deemed to include an "excess parachute payment"
pursuant to Section 280G of the Code, then benefits under this Agreement
shall be reduced (to not less than zero) to the extent necessary to
avoid the payment of an excess parachute payment by the Bank. The
Executive shall determine the allocation of such reduction among
payments to the Executive. The Bank shall be entitled to rely on
calculations provided by its independent auditors as to whether payments
to Executive would constitute excess parachute payments, and as to the
amount that payments are to be reduced to avoid any excess parachute
payment, which shall be binding on Executive.
6. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH
Termination by the Bank of the Executive based on "Retirement"
shall mean termination in accordance with the Bank's retirement policy
or in accordance with any retirement arrangement established with
Executive's consent with respect to him. Upon termination of Executive
upon Retirement, Executive shall be entitled to all benefits under any
retirement plan of the Bank and other plans to which Executive is a
party.
Termination by the Bank of Executive's employment based on
"Disability" shall mean termination because of any physical or mental
impairment which qualifies Executive for disability benefits under the
applicable long-term disability plan maintained by the Bank, or if no
such plan applies, which would qualify Executive for disability benefits
under the federal social security system. In the event Executive is
unable to perform his duties under this Agreement on a full-time basis
for a period of six (6) consecutive months by reason of Disability, the
Bank may terminate this Agreement, provided that the Bank shall be
obligated to pay the Executive, as disability pay, a bi-monthly payment
equal to sixty percent (60%) of Base Salary on the effective date of
such termination. These disability payments shall commence on the
effective date of Executive's termination and will end on the earlier of
(i) the date Executive returns to the full-time employment of the Bank
in the same capacity as he was employed prior to his termination for
Disability; (ii) Executive's full-time employment by another employer;
(iii) Executive attaining the age of 65; (iv) the date on which
payments commence to the Executive under any long-term disability plan
maintained by the Bank; or (v) Executive's death. Provided, further,
that any amounts actually paid to Executive pursuant to any disability
insurance or other such similar program which the Bank has provided or
may provide on behalf of its employees or pursuant to any worker's
compensation or social security disability program shall reduce the
disability benefits to be paid to the Executive pursuant to this
paragraph.
Notwithstanding any other provision, this Agreement shall
terminate, and the Bank shall have no further obligation hereunder, upon
the death of the Executive.
7. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of
the Executive's personal dishonesty with respect to the Bank, gross
negligence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties,
intentional and willful violation of any law, governmental rule or
regulation (other than traffic violations and regulations that do not
adversely affect the Bank, the Company, or their employees, or similar
offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. In determining gross negligence, the acts
or omissions shall be measured against standards generally prevailing in
the savings institutions industry. For purposes of this paragraph, no
act or failure to act on the part of Executive shall be considered
"willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's action or
omission was in the best interest of the Bank. Notwithstanding the
foregoing, Executive shall not be deemed to have been Terminated for
Cause unless and until there shall have been delivered to him a copy of
a resolution duly adopted by the affirmative vote of not less than a
majority of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice, in writing, to
Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and
specifying the particulars thereof in detail. Notwithstanding the
foregoing, any such good faith determination by the Board as to
Termination for Cause shall not be determinative as to the existence of
Cause in any judicial proceeding. The Executive shall not have the right
to receive compensation or other benefits for any period after
Termination for Cause. Any stock options granted to Executive under any
stock option plan of the Bank, the Company or any subsidiary or
affiliate thereof shall be null and void effective upon Executive's
receipt of Notice of Termination for Cause pursuant to Section 8 hereof,
unless and until the matter is successfully resolved in the Executive's
favor, and such stock options shall become entirely null and void
effective upon a determination in arbitration that termination was for
cause.
8. NOTICE
(a) Any purported termination by the Bank or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision
in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination
of Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean (A) if Executive's
employment is terminated for Disability, thirty (30) days after a Notice
of Termination is given (provided that he shall not have returned to the
performance of his duties on a full-time basis during such thirty (30)
day period), and (B) if his employment is terminated for any other
reason, the date specified in the Notice of Termination (which, in the
case of a Termination for Cause, shall not be less than thirty (30) days
from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination
for Cause is given, the Executive notifies the Bank that a dispute
exists concerning the termination, the parties shall promptly proceed to
arbitration and the Date of Termination shall be the date on which the
dispute is finally determined, either by mutual written agreement of the
parties or by a binding arbitration award, and provided further that the
Date of Termination shall be extended by a notice of dispute only if
such notice is given in good faith and the party giving such notice
pursues the resolution of such dispute with reasonable diligence. The
Bank shall continue to make the payments and provide the benefits
specified under this Agreement until the dispute is settled by
arbitration. In the event that it is determined by arbitration that
"Cause" for termination did exist, Executive shall not be entitled to
any further compensation or benefits from the Bank under the Agreement,
and if it is determined in arbitration that his dispute of termination
for Cause was not taken in good faith, he shall return all cash payments
made to him during the pendency of dispute, without interest thereon.
Notwithstanding the foregoing, no stock options held by Executive shall
be exercised during the pendency of the dispute, and the period for
exercising any such stock options shall be extended through the
resolution of the dispute by arbitration. If it is ultimately determined
in arbitration that "Cause" for terminating Executive's employment did
not exist, the Executive shall be entitled to receive from the Bank the
remaining payments and benefits due under this Agreement determined as
of the date of Executive's receipt of Notice of Termination, with full
offset for payments and benefits received pending the resolution of the
dispute by arbitration.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement
shall be subject to Executive's compliance with paragraph (b) of this
Section 9 and Section 10 during the term of this Agreement and during
any period during which payments are being made or benefits provided, to
Executive under this Agreement.
(b) Executive shall, upon reasonable notice, furnish such
information and assistance to the Bank as may reasonably be required by
the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder as
a result of which the Bank is paying Executive benefits under Section 4,
Executive agrees not to compete with the Bank and/or the Company for a
period of one (1) year following such termination in any city, town or
county in which the Bank and/or the Company has an office or has filed
an application for regulatory approval to establish an office,
determined as of the effective date of such termination, except as
agreed to pursuant to a resolution duly adopted by the Board. Executive
agrees that during such period and within said cities, towns and
counties, Executive shall not work for or advise, consult or otherwise
serve with, directly or indirectly, any entity whose business materially
competes with the depository, lending or other business activities of
the Bank and/or the Company. The parties hereto, recognizing that
irreparable injury will result to the Bank and/or the Company, its
business and property in the event of Executive's breach of this Section
10(a) agree that in the event of any such breach by Executive, the Bank
and/or the Company may be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof
by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Executive
represents and admits that Executive's experience and capabilities are
such that Executive can obtain employment in a business engaged in other
lines and/or of a different nature than the Bank and/or the Company, and
that the enforcement of a remedy by way of injunction will not prevent
Executive from earning a livelihood. Nothing herein will be construed
as prohibiting the Bank and/or the Company from pursuing any other
remedies available to the Bank and/or the Company for such breach or
threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of
the business activities and plans for business activities of the Bank
and affiliates thereof, as it may exist from time to time, is a
valuable, special and unique asset of the business of the Bank.
Executive will not, during or after the term of his employment, disclose
any knowledge of the past, present, planned or considered business
activities of the Bank or affiliates thereof to any person, firm,
corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of
banking, financial and/or economic principles, concepts or ideas which
are not solely and exclusively derived from the business plans and
activities of the Bank, and Executive may disclose any information
regarding the Bank or the Company which is otherwise publicly available.
In the event of a breach or threatened breach by Executive of this
Section 10, the Bank will be entitled to an injunction restraining
Executive from disclosing, in whole or in part, the knowledge of the
past, present, planned or considered business activities of the Bank or
affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part,
has been disclosed or is threatened to be disclosed. Nothing herein
will be construed as prohibiting the Bank from pursuing any other
remedies available to the Bank for such breach or threatened breach,
including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Bank. No special or
separate fund of the Bank shall be established and no other segregation
of assets of the Bank shall be made to assure payment. The Company
guarantees payment and provision of all amounts and benefits due
hereunder to Executive, and if such amounts and benefits due from the
Bank are not timely paid or provided by the Bank, such amounts and
benefits shall be paid or provided by the Company out of its general
funds. No special or separate fund of the Company shall be established
and no other segregation of assets of the Company shall be made to
assure payment.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the
parties hereto and supersedes any prior employment agreement between the
Bank or any predecessor of the Bank and Executive, including the
Employment Agreement dated November 24, 1993 between Executive and
Peterborough Savings Bank (the "PSB Employment Agreement"). No
provision of this Agreement shall be interpreted to mean that Executive
is subject to receiving fewer benefits than those available to him
without reference to this Agreement. Executive agrees that no Event of
Termination nor a Change in Control occurred under the PSB Employment
Agreement and that no payments or benefits are due him under the PSB
Employment Agreement as a result of the Merger Agreement and the
transactions contemplated thereby.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation, or to execution, attachment, levy, or similar process or
assignment by operation of law, and any attempt, voluntary or
involuntary, to affect any such action shall be null, void, and of no
effect.
(b) This Agreement shall be binding upon, and inure to the
benefit of, Executive and the Bank and their respective successors,
assigns and heirs.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to
have been waived, nor shall there be any estoppel against the
enforcement of any provision of this Agreement, except by written
instrument of the party charged with such waiver or estoppel. No such
written waiver shall be deemed a continuing waiver unless specifically
stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that
specifically waived.
15. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part
of any provision, is held invalid, such invalidity shall not affect any
other provision of this Agreement or any part of such provision not held
so invalid, and each such other provision and part thereof shall to the
full extent consistent with law continue in full force and effect. In
the event of any conflict or discrepancies between any provision of the
Agreement and existing federal or state laws and/or regulations, such
laws and regulations shall prevail, and the Agreement shall be construed
to be consistent therewith.
16. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely
for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
17. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New
Hampshire but only to the extent not superseded by federal law.
18. ARBITRATION
Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three arbitrators sitting in a location selected by
the Bank within fifty (50) miles from the location of the Bank, after
due consultation with Executive, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction;
provided, however, that Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during
the pendency of any dispute or controversy arising under or in
connection with this Agreement.
19. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank, provided that the dispute or
interpretation has been resolved in the Executive's favor.
20. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, and shall
indemnify Executive (and his heirs, executors and administrators) to the
fullest extent permitted under New Hampshire law against all expenses
and liabilities reasonably incurred by him in connection with or arising
out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or
not he continues to be a director or officer at the time of incurring
such expenses or liabilities), such expenses and liabilities to include,
but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by
the Board of Directors of the Bank). If such action, suit or proceeding
is brought against Executive in his capacity as an officer or director
of the Bank, however, such indemnification shall not apply to any
action, suit or proceeding relating to this Agreement and shall not
extend to matters as to which Executive is finally adjudged to be liable
for willful misconduct in the performance of his duties.
21. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same
extent that the Bank would be required to perform if no such succession
or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be
executed by their duly authorized officers, and Executive has signed
this Agreement, on the day and date first above written.
ATTEST: GRANITE BANK
/s/ Charles B. Paquette By: /s/ Charles W. Smith
_______________________ _________________________________
Secretary Charles W. Smith, Chief Executive
Officer
ATTEST: GRANITE STATE BANKSHARES, INC.
/s/ Charles B. Paquette By: /s/ Charles W. Smith
_______________________ _________________________________
Secretary Charles W. Smith, Chief Executive
Officer
WITNESS: EXECUTIVE:
/s/ William G. Pike /s/ Christopher J. Flynn
_______________________ _________________________________
RESTATED EXECUTIVE SUPPLEMENTAL RETIREMENT
INCOME AGREEMENT
FOR CHARLES W. SMITH
GRANITE BANK
Keene, New Hampshire
August, 1996
Financial Institution Consulting Corporation
700 Colonial Road, Suite 260
Memphis, Tennessee 38117
WATS: 1-800-873-0089
FAX: (901) 684-7411
(901) 684-7400
RESTATED EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
FOR CHARLES W. SMITH
This Restated Executive Supplemental Retirement Income Agreement (the
"Agreement"), effective as of the 12th day of August, 1996, amends and
restates the Supplemental Executive's Retirement Plan for Granite Bank
entered into on December 13, 1993, and formalizes the understanding by and
between GRANITE BANK (the "Bank"), a commercial savings bank, and CHARLES W.
SMITH (hereinafter referred to as "Executive"). Granite State Bankshares,
Inc. (the "Holding Company") is a party to this Agreement for the sole
purpose of guaranteeing the Bank's performance hereunder.
W I T N E S S E T H :
WHEREAS, the Executive is employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore
performed by the Executive and wishes to encourage his continued employment;
and
WHEREAS, the Executive wishes to be assured that he will be entitled
to a certain amount of additional compensation for some definite period of
time from and after retirement from active service with the Bank or other
termination of employment and wishes to provide his beneficiary with
benefits from and after death; and
WHEREAS, the Bank and the Executive wish to provide the terms and
conditions upon which the Bank shall pay such additional compensation to the
Executive after retirement or other termination of employment and/or death
benefits to his beneficiary after death; and
WHEREAS, the Bank has adopted this Restated Executive Supplemental
Retirement Income Agreement which controls all issues relating to benefits
as described herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
promises herein contained, the Bank and the Executive agree as follows:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
1.1 "Accrued Benefit Account" shall be represented by the bookkeeping
entries required to record the Executive's (i) Phantom Contributions
plus (ii) accrued interest, equal to the Interest Factor, earned to-
date on such amounts. However, neither the existence of such
bookkeeping entries nor the Accrued Benefit Account itself shall be
deemed to create either a trust of any kind, or a fiduciary
relationship between the Bank and the Executive or any Beneficiary.
1.2 "Act" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.3 "Bank" means GRANITE BANK and any successor thereto.
1.4 "Beneficiary" means the person or persons (and their heirs) designated
as Beneficiary in Exhibit B of this Agreement to whom the deceased
Executive's benefits are payable. If no Beneficiary is so designated,
then the Executive's Spouse, if living, will be deemed the
Beneficiary. If the Executive's Spouse is not living, then the
Children of the Executive will be deemed the Beneficiaries and will
take on a per stirpes basis. If there are no Children, then the Estate
of the Executive will be deemed the Beneficiary.
1.5 "Benefit Age" means the later of: (i) the Executive's sixty-second
(62nd) birthday or (ii) the actual date the Executive's full-time
service with the Bank terminates. The Board of Directors may, however,
in its sole discretion, amend clause (i) of this Subsection to lower
the Executive's Benefit Age in any instance in which the Executive's
employment terminates prior to Retirement Age and the Board of
Directors determines that such an amendment is advisable, based on the
circumstances of such termination, or amend clause (ii) of this
Subsection, upon the Executive's request, to permit the Executive to
commence receiving his Supplemental Retirement Income Benefit upon the
attainment of age sixty-two (62) despite the fact that the Executive's
full-time service with the Bank has not terminated.
1.6 "Benefit Eligibility Date" means the date on which the Executive is
entitled to receive any benefit(s) pursuant to Section(s) III or V of
this Agreement. It shall be the first day of the month following the
month in which the Executive attains his Benefit Age.
1.7 "Board of Directors" means the board of directors of the Bank.
1.8 "Cause" means personal dishonesty, willful misconduct, willful
malfeasance, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar
offenses), or final cease-and-desist order, material breach of any
provision of this Agreement, or gross negligence in matters of
material importance to the Bank.
1.9 "Change in Control" shall mean and include the following with respect
to the Bank or Holding Company:
(1) a Change in Control of a nature that would be required to be
reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); or
(2) a change in control of the Bank or Holding Company within the
meaning of 12 C.F.R. [Section Sign] 225.41 of Regulation Y of
the Federal Reserve Board; or
(3) a Change in Control at such time as
(i) any "person" (as the term is used in Sections 13(d) and
14(d) of the Exchange Act) or "group acting in concert" is
or becomes the "beneficial owner" (as defined in Rule 13d-
3 under the Exchange Act), directly or indirectly, of
securities of the Bank or the Holding Company representing
Ten Percent (10.0%) or more of any class of equity
securities of the Bank or the Holding Company (except for
any securities purchased by the Bank's Employee Stock
Ownership Plan and Trust) or any combination of common
stock, or other securities, rights, options or warrants
that are convertible into or otherwise carry the right to
acquire, shares of any class of equity security that would
constitute, upon such conversion or the exercise of such
right, ten percent (10%) of any class of equity security
of the Bank or the Holding Company after giving effect to
such conversion or exercise; or
(ii) individuals who constitute the board of directors on the
date hereof (the "Incumbent Board") cease for any reason
to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding
Company's stockholders was approved by the Holding
Company's nominating committee which is comprised of
members of the Incumbent Board, shall be, for purposes of
this clause (ii), considered as though he were a member of
the Incumbent Board; or
(iii) merger, consolidation, or sale of all or substantially all
of the assets of the Holding Company occurs; or
(iv) a proxy statement is issued soliciting proxies from the
stockholders of the Holding Company by someone other than
the current management of the Holding Company, seeking
stockholder approval of a plan of reorganization, merger,
or consolidation of the Holding Company with one or more
corporations as a result of which the outstanding shares
of the class of the Holding Company's securities are
exchanged for or converted into cash or property or
securities not issued by the Holding Company.
The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint
venture, a pool, a joint stock company, a trust, an unincorporated
organization or similar company, a syndicate or any other group formed
for the purpose of acquiring, holding or disposing of securities. The
term "acquire" means obtaining ownership, control, power to vote or
sole power of disposition of stock, directly or indirectly or through
one or more transactions or subsidiaries, through purchase,
assignment, transfer, exchange, succession or other means, including
(1) an increase in percentage ownership resulting from a redemption,
repurchase, reverse stock split or a similar transaction involving
other securities of the same class; and (2) the acquisition of stock
by a group of persons and/or companies acting in concert which shall
be deemed to occur upon the formation of such group, provided that an
investment advisor shall not be deemed to acquire the voting stock of
its advisee if the advisor (a) votes the stock only upon instruction
from the beneficial owner and (b) does not provide the beneficial
owner with advice concerning the voting of such stock. The term
"security" includes nontransferable subscription rights issued
pursuant to a plan of conversion, as well as a "security," as defined
in 15 U.S.C. [Section Sign] 78c(2)(1); and the term "acting in
concert" means (1) knowing participation in a joint activity or
interdependent conscious parallel action towards a common goal whether
or not pursuant to an express agreement, or (2) a combination or
pooling of voting or other interests in the securities of an issuer
for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or
otherwise. Further, acting in concert with any person or company shall
also be deemed to be acting in concert with any person or company that
is acting in concert with such other person or company.
Notwithstanding the above definitions, the Boards, in their
absolute discretion, may make a finding that a Change in Control of
the Bank or the Holding Company has taken place without the occurrence
of any or all of the events enumerated above.
1.10 "Children" means all natural or adopted children of the Executive, and
issue of any predeceased child or children.
1.11 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
1.12 "Contribution(s)" means those annual contributions which the Bank is
required to make to the Retirement Income Trust Fund on behalf of the
Executive in accordance with Subsection 2.1(a) and in the amounts set
forth in Exhibit A of the Agreement.
1.13 (a) "Disability Benefit" means the benefit payable to the Executive
following a determination, in accordance with Subsection 6.1(a), that
he is no longer able, properly and satisfactorily, to perform his
duties at the Bank.
(b) "Disability Benefit-Supplemental" (if applicable) means the
benefit payable to the Executive's Beneficiary upon the Executive's
death in accordance with Subsection 6.1(b).
1.14 "Effective Date" of this Agreement shall be August 12, 1996.
1.15 "Estate" means the estate of the Executive.
1.16 "Holding Company" means Granite State Bankshares, Inc., a corporation
organized under the laws of the State of New Hampshire, the holding
company for the Bank, and any successor thereto.
1.17 "Interest Factor" means monthly compounding, discounting or
annuitizing, as applicable, at a rate set forth in Exhibit A.
1.18 "Payout Period" means the time frame during which certain benefits
payable hereunder shall be distributed. Payments shall be made in
monthly installments commencing on the first day of the month
following the occurrence of the event which triggers distribution and
continuing for the Executive's life or for a period of two hundred
forty (240) months, whichever is longer. Should the Executive make a
Timely Election to receive a lump sum benefit payment, the Executive's
Payout Period shall be deemed to be one (1) month.
1.19 "Phantom Contributions" means those annual Contributions which the
Bank is no longer required to make on behalf of the Executive to the
Retirement Income Trust Fund. Rather, once the Executive has exercised
the withdrawal rights provided for in Subsection 2.2, the Bank shall
be required to record the annual amounts set forth in Exhibit A of the
Agreement in the Executive's Accrued Benefit Account, pursuant to
Subsection 2.1.
1.20 "Plan Year" shall mean August 12, 1996 through December 31, 1996, for
the first Plan Year. Thereafter, the term shall mean the twelve (12)
month period commencing January 1, 1997 and each consecutive twelve
(12) month period thereafter.
1.21 "Retirement Age" means the Executive's sixty-second (62nd) birthday
provided, however, that the Executive's actual retirement from full-
time employment may occur at any later date mutually agreed upon by
the parties.
1.22 "Retirement Income Trust Fund" means the trust fund account
established by the Executive and into which annual Contributions will
be made by the Bank on behalf of the Executive pursuant to Subsection
2.1. The contractual rights of the Bank and the Executive with respect
to the Retirement Income Trust Fund shall be outlined in a separate
writing to be known as the Charles W. Smith Grantor Trust agreement.
1.23 "Spouse" means the individual to whom the Executive is legally married
at the time of the Executive's death, provided, however, that the term
"Spouse" shall not refer to an individual to whom the Executive is
legally married at the time of death if the Executive and such
individual have entered into a formal separation agreement or
initiated divorce proceedings.
1.24 "Supplemental Retirement Income Benefit" means an annual amount
(before taking into account federal and state income taxes), payable
in monthly installments throughout the Payout Period. Such benefit is
projected pursuant to the Agreement for the purpose of determining the
Contributions to be made to the Retirement Income Trust Fund (or
Phantom Contributions to be recorded in the Accrued Benefit Account).
The annual Contributions and Phantom Contributions have been
actuarially determined, using the assumptions set forth in Exhibit A,
in order to fund for the projected Supplemental Retirement Income
Benefit. The Supplemental Retirement Income Benefit for which
Contributions (or Phantom Contributions) are being made (or recorded)
is set forth in Exhibit A.
1.25 "Timely Election" means the Executive has made an election to change
the form of his benefit payment(s) by filing with the Administrator a
Notice of Election to Change Form of Payment (Exhibit C of this
Agreement). In the case of benefits payable from the Accrued Benefit
Account, such election shall have been made prior to the event which
triggers distribution and at least two (2) years prior to the
Executive's Benefit Eligibility Date. In the case of benefits payable
from the Retirement Income Trust Fund, such election may be made at
any time.
SECTION II
BENEFITS - GENERALLY
2.1 (a) Retirement Income Trust Fund and Accrued Benefit Account. The
Executive shall establish the Charles W. Smith Grantor Trust into
which the Bank shall be required to make annual Contributions on the
Executive's behalf, pursuant to Exhibit A and this Section II of the
Agreement. A trustee shall be selected by the Executive. The trustee
shall maintain an account, separate and distinct from the Executive's
personal contributions, which account shall constitute the Retirement
Income Trust Fund. The trustee shall be charged with the
responsibility of investing all contributed funds. Distributions from
the Retirement Income Trust Fund of the Charles W. Smith Grantor Trust
may be made by the trustee to the Executive, for purposes of payment
of any income or employment taxes due and owing on Contributions by
the Bank to the Retirement Income Trust Fund, if any, and on any
taxable earnings associated with such Contributions which the
Executive shall be required to pay from year to year, under applicable
law, prior to actual receipt of any benefit payments from the
Retirement Income Trust Fund. If the Executive exercises his
withdrawal rights pursuant to Subsection 2.2, the Bank's obligation to
make Contributions to the Retirement Income Trust Fund shall cease and
the Bank's obligation to record Phantom Contributions in the Accrued
Benefit Account shall immediately commence pursuant to Exhibit A and
this Section II of the Agreement. To the extent this Agreement is
inconsistent with the Charles W. Smith Grantor Trust agreement, the
Charles W. Smith Grantor Trust Agreement shall supersede this
Agreement.
The annual Contributions (or Phantom Contributions) required to be
made by the Bank to the Retirement Income Trust Fund (or recorded by
the Bank in the Accrued Benefit Account) have been actuarially
determined and are set forth in Exhibit A which is attached hereto and
incorporated herein by reference. Contributions shall be made by the
Bank to the Retirement Income Trust Fund (i) within seventy-five (75)
days of establishment of such trust, and (ii) within the first ten
(10) days of the beginning of each subsequent Plan Year, unless this
Section expressly provides otherwise. Phantom Contributions, if any,
shall be recorded in the Accrued Benefit Account within the first
thirty (30) days of the beginning of each applicable Plan Year,
unless this Section expressly provides otherwise. Phantom
Contributions shall accrue interest at a rate equal to the Interest
Factor, during the Payout Period, until the balance of the Accrued
Benefit Account has been fully distributed. Interest on any Phantom
Contribution shall not commence until such Payout Period commences.
The Administrator shall review the schedule of annual Contributions
(or Phantom Contributions) provided for in Exhibit A (i) within thirty
(30) days prior to the close of each Plan Year and (ii) if the
Executive is employed by the Bank until attaining Retirement Age, on
or immediately before attainment of such Retirement Age. Such review
shall consist of an evaluation of the accuracy of all assumptions used
to establish the schedule of Contributions (or Phantom Contributions).
Provided that (i) the Executive has not exercised his withdrawal
rights pursuant to Subsection 2.2 and (ii) the investments contained
in the Retirement Income Trust Fund have been deemed reasonable by the
Bank, the Administrator shall prospectively amend or supplement the
schedule of Contributions provided for in Exhibit A should the
Administrator determine during any such review that an increase in or
supplement to the schedule of Contributions is necessary in order to
adequately fund the Retirement Income Trust Fund so as to provide an
annual benefit (or to provide the lump sum equivalent of such benefit,
as applicable) equal to the Supplemental Retirement Income Benefit, on
an after-tax basis, commencing at Benefit Age and payable for the
duration of the Payout Period.
(b) Withdrawal Rights Not Exercised.
(1) Contributions Made Annually
If the Executive does not exercise any withdrawal rights pursuant to
Subsection 2.2, the annual Contributions to the Retirement Income
Trust Fund shall continue each year, unless this Subsection 2.1(b)
specifically states otherwise, until the earlier of (i) the last Plan
Year that Contributions are required pursuant to Exhibit A, or (ii)
the Plan Year of the Executive's termination of employment.
(2) Termination Following a Change in Control
If the Executive does not exercise his withdrawal rights pursuant to
Subsection 2.2 and a Change in Control occurs at the Bank, followed
within thirty-six (36) months by either (i) the Executive's
involuntary termination of employment, or (ii) Executive's voluntary
termination of employment after: (A) a material change in the
Executive's function, duties, or responsibilities, which change would
cause the Executive's position to become one of lesser responsibility,
importance, or scope from the position the Executive held at the time
of the Change in Control, (B) a relocation of the Executive's
principal place of employment by more than thirty (30) miles from its
location prior to the Change in Control, or (C) a material reduction
in the benefits and perquisites to the Executive from those being
provided at the time of the Change in Control, the Contribution set
forth below shall be required of the Bank. The Bank shall be required
to make a final Contribution to the Retirement Income Trust Fund
within ten (10) days of the Executive's termination of employment
equal to the present value (using the Interest Factor) of all
remaining Contributions which would have been required to be made on
behalf of Executive if Executive had remained in the employ of the
Bank until Benefit Age; provided, however, in no event shall the
Contribution be less than an amount which is sufficient to provide the
Executive with after-tax benefits (assuming a constant tax rate equal
to the rate in effect as of the date of Executive's termination)
beginning at his Benefit Age, equal in amount to that benefit which
would have been payable to the Executive if no secular trust had been
implemented and the benefit obligation had been accrued under APB
Opinion No. 12, as amended by FAS 106.
.
(3) Termination For Cause
If the Executive does not exercise his withdrawal rights pursuant to
Subsection 2.2, and is terminated for Cause pursuant to Subsection
5.2, no further Contribution(s) to the Retirement Income Trust Fund
shall be required of the Bank, and if not yet made, no Contribution
shall be required for the Plan Year in which such termination for
Cause occurs.
(4) Involuntary Termination of Employment.
If the Executive does not exercise his withdrawal rights pursuant to
Subsection 2.2, and the Executive's employment with the Bank is
involuntarily terminated for any reason, including a termination due
to disability of the Executive but excluding termination for Cause, or
termination following a Change in Control, within ten (10) days of
such involuntary termination of employment, the Bank shall be required
to make an immediate lump sum Contribution to the Executive's
Retirement Income Trust Fund in an amount equal to the: (i) the full
Contribution required for the Plan Year in which such involuntary
termination occurs, if not yet made, plus (ii) the present value
(computed using a discount rate equal to the Interest Factor) of the
lesser of (A) the next five (5) years Contributions to the Retirement
Income Trust Fund or (B) all remaining Contributions to the Retirement
Income Trust Fund; provided however, that, if necessary, an amount
shall be contributed to the Retirement Income Trust Fund which is
sufficient to provide the Executive with after tax benefits (assuming
a constant tax rate equal to the rate in effect as of the date of the
Executive's termination) beginning at his Benefit Age, equal in amount
to that benefit which would have been payable to the Executive if no
secular trust had been implemented and the benefit obligation had been
accrued under APB Opinion No. 12, as amended by FAS 106.
(5) Death During Employment.
If the Executive does not exercise any withdrawal rights pursuant to
Subsection 2.2, and dies while employed by the Bank, and if, following
the Executive's death, the assets of the Retirement Income Trust Fund
are insufficient to provide the Supplemental Retirement Income Benefit
to which the Executive is entitled, the Bank shall be required to make
a Contribution to the Retirement Income Trust Fund equal to the sum of
the remaining Contributions set forth on Exhibit A, after taking into
consideration any payments under any life insurance policies that may
have been obtained on the Executive's life by the Retirement Income
Trust Fund. Such final contribution shall be payable in a lump sum to
the Retirement Income Trust Fund within thirty (30) days of the
Executive's death.
(c) Withdrawal Rights Exercised.
(1) Phantom Contributions Made Annually.
If the Executive exercises his withdrawal rights pursuant to
Subsection 2.2, no further Contributions to the Retirement Income
Trust Fund shall be required of the Bank. Thereafter, Phantom
Contributions shall be recorded annually in the Executive's Accrued
Benefit Account within ten (10) days of the beginning of each Plan
Year, commencing with the first Plan Year following the Plan Year in
which the Executive exercises his withdrawal rights. Such Phantom
Contributions shall continue to be recorded annually, unless this
Subsection 2.1(c) specifically states otherwise, until the earlier of
(i) the last Plan Year that Phantom Contributions are required
pursuant to Exhibit A, or (ii) the Plan Year of the Executive's
termination of employment.
(2) Termination Following a Change in Control
If the Executive exercises his withdrawal rights pursuant to
Subsection 2.2, Phantom Contributions shall commence in the Plan Year
following the Plan Year in which the Executive first exercises his
withdrawal rights. If a Change in Control occurs at the Bank, and
within thirty-six (36) months of such Change in Control, the
Executive's employment is either (i) involuntarily terminated, or (ii)
voluntarily terminated by the Executive after: (A) a material change
in the Executive's function, duties, or responsibilities, which change
would cause the Executive's position to become one of lesser
responsibility, importance, or scope from the position the Executive
held at the time of the Change in Control, (B) a relocation of the
Executive's principal place of employment by more than thirty (30)
miles from its location prior to the Change in Control, or (C) a
material reduction in the benefits and perquisites to the Executive
from those being provided at the time of the Change in Control, the
Phantom Contribution set forth below shall be required of the Bank.
The Bank shall be required to record a lump sum Phantom Contribution
in the Accrued Benefit Account within ten (10) days of the Executive's
termination of employment. The amount of such final Phantom
Contribution shall be actuarially determined based on the Phantom
Contribution required, at such time, in order to provide a benefit via
this Agreement equivalent to the Supplemental Retirement Income
Benefit, on an after-tax basis, commencing on the Executive's Benefit
Eligibility Date and continuing for the duration of the Payout Period.
(Such actuarial determination shall reflect the fact that amounts
shall be payable from both the Accrued Benefit Account as well as the
Retirement Income Trust Fund and shall also reflect the amount and
timing of any withdrawal(s) made by the Executive from the Retirement
Income Trust Fund pursuant to Subsection 2.2.)
(3) Termination For Cause
If the Executive is terminated for Cause pursuant to Subsection 5.2,
the entire balance of the Executive's Accrued Benefit Account at the
time of such termination, which shall include any Phantom
Contributions which have been recorded plus interest accrued on such
Phantom Contributions, shall be forfeited.
(4) Involuntary Termination of Employment.
If the Executive exercises his withdrawal rights pursuant to
Subsection 2.2, and the Executive's employment with the Bank is
involuntarily terminated for any reason including termination due to
disability of the Executive, but excluding termination for Cause, or
termination following a Change in Control, within ten (10) days of
such involuntary termination of employment, the Bank shall be required
to record a final Phantom Contribution in an amount equal to: (i) the
full Phantom Contribution required for the Plan Year in which such
involuntary termination occurs, if not yet made, plus (ii) the present
value (computed using a discount rate equal to the Interest Factor) of
the lesser of (A) the next five (5) years Contributions to the
Retirement Income Trust Fund or (B) all remaining Phantom
Contributions.
(5) Death During Employment.
If the Executive exercises his withdrawal rights pursuant to
Subsection 2.2, and dies while employed by the Bank, Phantom
Contributions included on Exhibit A shall be required of the Bank.
Such Phantom Contributions shall commence in the Plan Year following
the Plan Year in which the Executive exercises his withdrawal rights
and shall continue through the Plan Year in which the Executive dies.
The Bank shall also be required to record a final Phantom Contribution
within thirty (30) days of the Executive's death. The amount of such
final Phantom Contribution shall be actuarially determined based on
the Phantom Contribution required at such time (if any), in order to
provide a benefit via this Agreement equivalent to the Supplemental
Retirement Income Benefit commencing within thirty (30) days of the
date the Administrator receives notice of the Executive's death and
continuing for the duration of the Payout Period. (Such actuarial
determination shall reflect the fact that amounts shall be payable
from the Accrued Benefit Account as well as the Retirement Income
Trust Fund and shall also reflect the amount and timing of any
withdrawal(s) made by the Executive pursuant to Subsection 2.2.)
2.2 Withdrawals From Retirement Income Trust Fund.
Exercise of withdrawal rights by the Executive pursuant to the Charles
W. Smith Grantor Trust agreement shall terminate the Bank's obligation
to make any further Contributions to the Retirement Income Trust Fund,
and the Bank's obligation to record Phantom Contributions pursuant to
Subsection 2.1(c) shall commence. For purposes of this Subsection 2.2,
"exercise of withdrawal rights" shall mean those withdrawal rights to
which the Executive is entitled under Article III of the Charles W.
Smith Grantor Trust agreement and shall exclude any distributions made
by the trustee of the Retirement Income Trust Fund to the Executive
for purposes of payment of income taxes in accordance with Subsection
2.1 of this Agreement and the tax reimbursement formula contained in
the trust document, or other trust expenses properly payable from the
Charles W. Smith Grantor Trust pursuant to the provisions of the trust
document.
2.3 Benefits Payable From Retirement Income Trust Fund
Notwithstanding anything else to the contrary in this Agreement, in
the event that the trustee of the Retirement Income Trust Fund
purchases a life insurance policy with the Contributions to and, if
applicable, earnings of the Trust, and such life insurance policy is
intended to continue in force beyond the Payout Period for the
disability or retirement benefits payable from the Retirement Income
Trust Fund pursuant to this Agreement, then the Trustee shall have
discretion to determine the portion of the cash value of such policy
available for purposes of annuitizing the Retirement Income Trust Fund
to provide the disability or retirement benefits payable under this
Agreement, after taking into consideration the amounts reasonably
believed to be required in order to maintain the cash value of such
policy to continue such policy in effect until the death of the
Executive and payment of death benefits thereunder.
SECTION III
RETIREMENT BENEFIT
3.1 (a) Normal form of payment.
If (i) the Executive is employed with the Bank until reaching his
Retirement Age, and (ii) the Executive has not made a Timely Election
to receive a lump sum benefit, this Subsection 3.1(a) shall be
controlling with respect to retirement benefits.
Upon attaining his Benefit Age, the Retirement Income Trust Fund shall
become available to the Executive for any lump sum or period
distributions which the Executive may desire, provided reasonable
notice of such distribution(s) is communicated by the Executive to the
trustee of the Retirement Income Trust Fund. In the event the
Executive dies at any time after attaining his Benefit Age, but prior
to complete liquidation of the Retirement Income Trust Fund, the
balance of the Retirement Income Trust Fund shall be paid to the
Executive's Beneficiary in a lump sum.
The Executive's Accrued Benefit Account (if applicable), is measured
as of the Executive's Benefit Age, shall be annuitized (using the
Interest Factor) into monthly installments and shall be payable for
the Payout Period. Such benefit payments shall commence on the
Executive's Benefit Eligibility Date. In the event the Executive dies
at any time after attaining his Benefit Age, but prior to commencement
or completion of all the payments due and owing hereunder, (i) the
Bank shall pay to the Executive's Beneficiary the same monthly
installments (or a continuation of such monthly installments if they
have already commenced) for the balance of months remaining in the
Payout Period, or (ii) the Executive's Beneficiary may request to
receive the remainder of any unpaid benefit payments in a lump sum
payment. If a lump sum payment is requested by the Beneficiary, the
amount of such lump sum payment shall be equal to the unpaid balance
of the Executive's Accrued Benefit Account. Payment in such lump sum
form shall be made only if the Executive's Beneficiary (i) obtains
Board of Director approval, and (ii) notifies the Administrator in
writing of such election within ninety (90) days of the Executive's
death. Such lump sum payment, if approved by the Board of Directors,
shall be made within thirty (30) days of such Board of Director
approval.
(b) Alternative payout option.
If (i) the Executive is employed with the Bank until reaching his
Retirement Age, and (ii) the Executive has made a Timely Election to
receive a lump sum benefit, this Subsection 3.1(b) shall be
controlling with respect to retirement benefits.
The balance of the Retirement Income Trust Fund, measured as of the
Executive's Benefit Age, shall be paid to the Executive in a lump sum
on his Benefit Eligibility Date. In the event the Executive dies after
becoming eligible for such payment (upon attainment of his Benefit
Age), but before the actual payment is made, his Beneficiary shall be
entitled to receive the lump sum benefit in accordance with this
Subsection 3.1(b) within thirty (30) days of the date the
Administrator receives notice of the Executive's death.
The balance of the Executive's Accrued Benefit Account (if
applicable), measured as of the Executive's Benefit Age, shall be paid
to the Executive in a lump sum on his Benefit Eligibility Date. In the
event the Executive dies after becoming eligible for such payment
(upon attainment of his Benefit Age), but before the actual payment is
made, his Beneficiary shall be entitled to receive the lump sum
benefit in accordance with this Subsection 3.1(b) within thirty (30)
days of the date the Administrator receives notice of the Executive's
death.
SECTION IV
PRE-RETIREMENT DEATH BENEFIT
4.1 (a) Normal form of payment.
If (i) the Executive dies while employed by the Bank, and (ii) the
Executive has not made a Timely Election to receive a lump sum
benefit, this Subsection 4.1(a) shall be controlling with respect to
pre-retirement death benefits.
The balance of the Executive's Retirement Income Trust Fund, measured
as of the later of (i) the Executive's death, or (ii) the date any
final lump sum Contribution is made pursuant to Subsection 2.1(b),
shall be paid to the Executive's Beneficiary in a lump sum within
thirty (30) days of the date the Administrator receives notice of the
Executive's death.
The Executive's Accrued Benefit Account (if applicable), measured as
of the later of (i) the Executive's death or (ii) the date any final
lump sum Phantom Contribution is recorded in the Accrued Benefit
Account pursuant to Subsection 2.1(c), shall be annuitized (using the
Interest Factor) into monthly installments and shall be payable to the
Executive's Beneficiary for the Payout Period. Such benefit payments
shall commence within thirty (30) days of the date the Administrator
receives notice of the Executive's death, or if later, within thirty
(30) days after any final lump sum Phantom Contribution is recorded in
the Accrued Benefit Account in accordance with Subsection 2.1(c). The
Executive's Beneficiary may request to receive the remainder of any
unpaid monthly benefit payments due from the Accrued Benefit Account
in a lump sum payment. If a lump sum payment is requested by the
Beneficiary, the amount of such lump sum payment shall be equal to the
balance of the Executive's Accrued Benefit Account. Payment in such
lump sum form shall be made only if the Executive's Beneficiary (i)
obtains Board of Director approval, and (ii) notifies the
Administrator in writing of such election within ninety (90) days of
the Executive's death. Such lump sum payment, if approved by the Board
of Directors, shall be payable within thirty (30) days of such Board
of Director approval.
(b) Alternative payout option.
If (i) the Executive dies while employed by the Bank, and (ii) the
Executive has made a Timely Election to receive a lump sum benefit,
this Subsection 4.1(b) shall be controlling with respect to pre-
retirement death benefits.
The balance of the Executive's Retirement Income Trust Fund, measured
as of the later of (i) the Executive's death, or (ii) the date any
final lump sum Contribution is made pursuant to Subsection 2.1(b),
shall be paid to the Executive's Beneficiary in a lump sum within
thirty (30) days of the date the Administrator receives notice of the
Executive's death.
The balance of the Executive's Accrued Benefit Account (if
applicable), measured as of the later of (i) the Executive's death, or
(ii) the date any final Phantom Contribution is recorded pursuant to
Subsection 2.1(c), shall be paid to the Executive's Beneficiary in a
lump sum within thirty (30) days of the date the Administrator
receives notice of the Executive's death.
SECTION V
BENEFIT(S) IN THE EVENT OF TERMINATION OF SERVICE
PRIOR TO RETIREMENT AGE
5.1 Voluntary or Involuntary Termination of Service Other Than for Cause.
In the event the Executive's service with the Bank is voluntarily or
involuntarily terminated prior to Retirement Age, for any reason
including a Change in Control, but excluding (i) any disability
related termination for which the Board of Directors has approved
early payment of benefits pursuant to Subsection 6.1, (ii) the
Executive's pre-retirement death, which shall be covered in Section
IV, or (iii) termination for Cause, which shall be covered in
Subsection 5.2, the Executive (or his Beneficiary) shall be entitled
to receive benefits in accordance with this Subsection 5.1. Payments
of benefits pursuant to this Subsection 5.1 shall be made in
accordance with Subsection 5.1 (a) or 5.1 (b) below, as applicable.
(a) Normal form of payment.
(1) Executive Lives Until Benefit Age
If (i) after such termination, the Executive lives until attaining his
Benefit Age, and (ii) the Executive has not made a Timely Election to
receive a lump sum benefit, this Subsection 5.1(a)(1) shall be
controlling with respect to retirement benefits.
Upon attaining his Benefit Age, the Retirement Income Trust Fund shall
become available to the Executive for any lump sum or period
distributions which the Executive may desire, provided reasonable
notice of such distribution(s) is communicated by the Executive to the
trustee of the Retirement Income Trust Fund. In the event the
Participant dies at any time after attaining his Benefit Age, but
prior to complete liquidation of the Retirement Income Trust Fund, the
balance of the Retirement Income Trust Fund shall be paid to the
Executive 's Beneficiary in a lump sum.
The Executive's Accrued Benefit Account (if applicable), measured as
of the Executive's Benefit Age, shall be annuitized (using the
Interest Factor) into monthly installments and shall be payable for
the Payout Period. Such benefit payments shall commence on the
Executive's Benefit Eligibility Date. In the event the Executive dies
at any time after attaining his Benefit Age, but prior to commencement
or completion of all the payments due and owing hereunder, (i) the
Bank shall pay to the Executive's Beneficiary the same monthly
installments (or a continuation of such monthly installments if they
have already commenced) for the balance of months remaining in the
Payout Period, or (ii) the Executive's Beneficiary may request to
receive the remainder of any unpaid benefit payments in a lump sum
payment. If a lump sum payment is requested by the Beneficiary, the
amount of such lump sum payment shall be equal to the unpaid balance
of the Executive's Accrued Benefit Account. Payment in such lump sum
form shall be made only if the Executive's Beneficiary (i) obtains
Board of Director approval, and (ii) notifies the Administrator in
writing of such election within ninety (90) days of the Executive's
death. Such lump sum payment, if approved by the Board of Directors,
shall be made within thirty (30) days of such Board of Director
approval.
(2) Executive Dies Prior to Benefit Age
If (i) after such termination, the Executive dies prior to attaining
his Benefit Age, and (ii) the Executive has not made a Timely Election
to receive a lump sum benefit, this Subsection 5.1(a)(2) shall be
controlling with respect to retirement benefits.
The Retirement Income Trust Fund, measured as of the date of the
Executive's death, shall be paid to the Executive's Beneficiary in a
lump sum. Such benefit payment shall commence within thirty (30) days
of the date the Administrator receives notice of the Executive's
death.
The Executive's Accrued Benefit Account (if applicable), measured as
of the date of the Executive's death, shall be annuitized (using the
Interest Factor) into monthly installments and shall be payable for
the Payout Period. Such payments shall commence within thirty (30)
days of the date the Administrator receives notice of the Executive's
death. The Executive's Beneficiary may request to receive the unpaid
balance of the Executive's Accrued Benefit Account in the form of a
lump sum payment. If a lump sum payment is requested by the
Beneficiary, payment of the balance of the Accrued Benefit Account in
such lump sum form shall be made only if the Executive's Beneficiary
(i) obtains Board of Director approval, and (ii) notifies the
Administrator in writing of such election within ninety (90) days of
the Executive's death. Such lump sum payment, if approved by the Board
of Directors, shall be made within thirty (30) days of such Board of
Director approval.
(b) Alternative Payout Option.
(1) Executive Lives Until Benefit Age
If (i) after such termination, the Executive lives until attaining his
Benefit Age, and (ii) the Executive has made a Timely Election to
receive a lump sum benefit, this Subsection 5.1(b)(1) shall be
controlling with respect to retirement benefits.
The balance of the Retirement Income Trust Fund, measured as of the
Executive's Benefit Age, shall be paid to the Executive in a lump sum
on his Benefit Eligibility Date. In the event the Executive dies after
becoming eligible for such payment (upon attainment of his Benefit
Age), but before the actual payment is made, his Beneficiary shall be
entitled to receive the lump sum benefit in accordance with this
Subsection 5.1(b)(1) within thirty (30) days of the date the
Administrator receives notice of the Executive's death.
The balance of the Executive's Accrued Benefit Account (if
applicable), measured as of the Executive's Benefit Age, shall be paid
to the Executive in a lump sum on his Benefit Eligibility Date. In the
event the Executive dies after becoming eligible for such payment
(upon attainment of his Benefit Age), but before the actual payment is
made, his Beneficiary shall be entitled to receive the lump sum
benefit in accordance with this Subsection 5.1(b)(1) within thirty
(30) days of the date the Administrator receives notice of the
Executive's death.
(2) Executive Dies Prior to Benefit Age
If (i) after such termination, the Executive dies prior to attaining
his Benefit Age, and (ii) the Executive has made a Timely Election to
receive a lump sum benefit, this Subsection 5.1(b)(2) shall be
controlling with respect to pre-retirement death benefits.
The balance of the Retirement Income Trust Fund, measured as of the
date of the Executive's death, shall be paid to the Executive's
Beneficiary within thirty (30) days of the date the Administrator
receives notice of the Executive's death.
The balance of the Executive's Accrued Benefit Account (if
applicable), measured as of the date of the Executive's death, shall
be paid to the Executive's Beneficiary within thirty (30) days of the
date the Administrator receives notice of the Executive's death.
5.2 Termination For Cause.
If the Executive is terminated for Cause, all benefits under this
Agreement, other than those which can be paid from previous
Contributions to the Retirement Income Trust Fund (and earnings on
such Contributions), shall be forfeited. Furthermore, no further
Contributions (or Phantom Contributions, as applicable) shall be
required of the Bank for the year in which such termination for Cause
occurs (if not yet made). The Executive shall be entitled to receive a
benefit in accordance with this Subsection 5.2.
The balance of the Executive's Retirement Income Trust Fund shall be
paid to the Executive in a lump sum on his Benefit Eligibility Date.
In the event the Executive dies prior to his Benefit Eligibility Date,
his Beneficiary shall be entitled to receive the balance of the
Executive's Retirement Income Trust Fund in a lump sum within thirty
(30) days of the date the Administrator receives notice of the
Executive's death.
SECTION VI
OTHER BENEFITS
6.1 (a) Disability Benefit.
If the Executive's service is terminated prior to Retirement Age due
to a disability which meets the criteria set forth below, the
Executive may request to receive the Disability Benefit in lieu of the
retirement benefit(s) available pursuant to Section 5.1 (which is
(are) not available prior to the Executive's Benefit Eligibility
Date).
In any instance in which: (i) it is determined by a duly licensed,
independent physician selected by the Bank, that the Executive is no
longer able, properly and satisfactorily, to perform his regular
duties as an officer, because of ill health, accident, disability or
general inability due to age, (ii) the Executive requests payment
under this Subsection in lieu of Subsection 5.1, and (iii) Board of
Director approval is obtained to allow payment under this Subsection,
in lieu of Subsection 5.1, the Executive shall be entitled to the
following lump sum benefit(s). The lump sum benefit(s) to which the
Executive is entitled shall include: (i) the balance of the Retirement
Income Trust Fund, plus (ii) the balance of the Accrued Benefit
Account (if applicable). The benefit(s) shall be paid within thirty
(30) days following the date of the Executive's request for such
benefit is approved by the Board of Directors. In the event the
Executive dies after becoming eligible for such payment(s) but before
the actual payment(s) is (are) made, his Beneficiary shall be entitled
to receive the benefit(s) provided for in this Subsection 6.1(a)
within thirty (30) days of the date the Administrator receives notice
of the Executive's death.
(b) Disability Benefit - Supplemental.
Furthermore, if Board of Director approval is obtained within thirty
(30) days of the Executive's death, the Bank shall make a direct, lump
sum payment to the Executive's Beneficiary in an amount equal to the
sum of all remaining Contributions (or Phantom Contributions) set
forth in Exhibit A, but not required pursuant to Subsection 2.1(b) (or
2.1(c)) due to the Executive's disability-related termination. Such
lump sum payment, if approved by the Board of Directors, shall be
payable to the Executive's Beneficiary within thirty (30) days of such
Board of Director approval.
6.2 Additional Death Benefit - Burial Expense. Upon the Executive's death,
the Executive's Beneficiary shall also be entitled to receive a one-
time lump sum death benefit in the amount of Thirty Thousand Dollars
($30,000.00). This benefit shall be paid directly from the Bank to the
Beneficiary and shall be provided specifically for the purpose of
providing payment for burial and/or funeral expenses of the Executive.
Such death benefit shall be payable within thirty (30) days from the
date the Administrator receives notice of the Executive's death. The
Executive's Beneficiary shall not be entitled to such benefit if the
Executive is terminated for Cause prior to death.
SECTION VII
BENEFICIARY DESIGNATION
The Executive shall make an initial designation of primary and
secondary Beneficiaries upon execution of this Agreement and shall
have the right to change such designation, at any subsequent time, by
submitting to (i) the Administrator, and (ii) the trustee of the
Retirement Income Trust Fund, in substantially the form attached as
Exhibit B to this Agreement, a written designation of primary and
secondary Beneficiaries. Any Beneficiary designation made subsequent
to execution of this Agreement shall become effective only when
receipt is acknowledged in writing by the Administrator.
SECTION VIII
EXECUTIVE'S RIGHT TO ASSETS
The rights of the Executive, any Beneficiary, or any other person
claiming through the Executive under this Agreement, shall be solely
those of an unsecured general creditor of the Bank. The Executive, the
Beneficiary, or any other person claiming through the Executive, shall
only have the right to receive from the Bank those payments or amounts
so specified under this Agreement. The Executive agrees that he, his
Beneficiary, or any other person claiming through him shall have no
rights or interests whatsoever in any asset of the Bank, including any
insurance policies or contracts which the Bank may possess or obtain
to informally fund this Agreement. Any asset used or acquired by the
Bank in connection with the liabilities it has assumed under this
Agreement shall not be deemed to be held under any trust for the
benefit of the Executive or his Beneficiaries, unless such asset is
contained in the rabbi trust described in Section XII of this
Agreement. Any such asset shall be and remain, a general, unpledged
asset of the Bank in the event of the Bank's insolvency.
SECTION IX
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Agreement,
other than those Contributions required to be made to the Retirement
Income Trust Fund. The Executive, his Beneficiaries or any successor
in interest to him shall be and remain simply a general unsecured
creditor of the Bank in the same manner as any other creditor having a
general claim for matured and unpaid compensation. The Bank reserves
the absolute right in its sole discretion to either purchase assets to
meet its obligations undertaken by this Agreement or to refrain from
the same and to determine the extent, nature, and method of such asset
purchases. Should the Bank decide to purchase assets such as life
insurance, mutual funds, disability policies or annuities, the Bank
reserves the absolute right, in its sole discretion, to replace such
assets from time to time or to terminate its investment in such assets
at any time, in whole or in part. At no time shall the Executive be
deemed to have any lien, right, title or interest in or to any
specific investment or to any assets of the Bank. If the Bank elects
to invest in a life insurance, disability or annuity policy upon the
life of the Executive, then the Executive shall assist the Bank by
freely submitting to a physical examination and by supplying such
additional information necessary to obtain such insurance or
annuities.
SECTION X
ACT PROVISIONS
10.1 Named Fiduciary and. The Bank shall be the Named Fiduciary and
Administrator (the "Administrator") of this Agreement. As
Administrator, the Bank shall be responsible for the management,
control and administration of the Agreement as established herein. The
Administrator may delegate to others certain aspects of the management
and operational responsibilities of the Agreement, including the
employment of advisors and the delegation of ministerial duties to
qualified individuals.
10.2 Claims Procedure and Arbitration. In the event that benefits under
this Agreement are not paid to the Executive (or to his Beneficiary in
the case of the Executive's death) and such claimants feel they are
entitled to receive such benefits, then a written claim must be made
to the Administrator within sixty (60) days from the date payments are
refused. The Administrator shall review the written claim and, if the
claim is denied, in whole or in part, it shall provide in writing,
within ninety (90) days of receipt of such claim, its specific reasons
for such denial, reference to the provisions of this Agreement upon
which the denial is based, and any additional material or information
necessary to perfect the claim. Such writing by the Administrator
shall further indicate the additional steps which must be undertaken
by claimants if an additional review of the claim denial is desired.
If claimants desire a second review, they shall notify the
Administrator in writing within sixty (60) days of the first claim
denial. Claimants may review this Agreement or any documents relating
thereto and submit any issues and comments, in writing, they may feel
appropriate. In its sole discretion, the Administrator shall then
review the second claim and provide a written decision within sixty
(60) days of receipt of such claim. This decision shall state the
specific reasons for the decision and shall include reference to
specific provisions of this Agreement upon which the decision is
based.
If claimants continue to dispute the benefit denial based upon
completed performance of this Agreement or the meaning and effect of
the terms and conditions thereof, then claimants may submit the
dispute to a Board of Arbitration for final arbitration. Said Board of
Arbitration shall consist of one member selected by the claimant, one
member selected by the Bank, and the third member selected by the
first two members. The Board of Arbitration shall operate under any
generally recognized set of arbitration rules. The parties hereto
agree that they, their heirs, personal representatives, successors and
assigns shall be bound by the decision of such Board of Arbitration
with respect to any controversy properly submitted to it for
determination.
SECTION XI
MISCELLANEOUS
11.1 No Effect on Employment Rights. Nothing contained herein will confer
upon the Executive the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with
the Executive without regard to the existence of the Agreement.
11.2 State Law. The Agreement is established under, and will be construed
according to, the laws of the state of New Hampshire, to the extent
such laws are not preempted by the Act and valid regulations published
thereunder.
11.3 Severability. In the event that any of the provisions of this
Agreement or portion thereof, are held to be inoperative or invalid by
any court of competent jurisdiction, then: (1) insofar as is
reasonable, effect will be given to the intent manifested in the
provisions held invalid or inoperative, and (2) the validity and
enforceability of the remaining provisions will not be affected
thereby.
11.4 Incapacity of Recipient. In the event the Executive is declared
incompetent and a conservator or other person legally charged with the
care of his person or Estate is appointed, any benefits under the
Agreement to which such Executive is entitled shall be paid to such
conservator or other person legally charged with the care of his
person or Estate.
11.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his
current address and the current address of his Beneficiaries. The Bank
shall not be obligated to search for the whereabouts of any person. If
the location of the Executive is not made known to the Bank as of the
date upon which any payment of any benefits from the Accrued Benefit
Account may first be made, the Bank shall delay payment of the
Executive's benefit payment(s) until the location of the Executive is
made known to the Bank; however, the Bank shall only be obligated to
hold such benefit payment(s) for the Executive until the expiration of
thirty-six (36) months. Upon expiration of the thirty-six (36) month
period, the Bank may discharge its obligation by payment to the
Executive's Beneficiary. If the location of the Executive's
Beneficiary is not made known to the Bank by the end of an additional
two (2) month period following expiration of the thirty-six (36) month
period, the Bank may discharge its obligation by payment to the
Executive's Estate. If there is no Estate in existence at such time or
if such fact cannot be determined by the Bank, the Executive and his
Beneficiary(ies) shall thereupon forfeit any rights to the balance, if
any, of the Executive's Accrued Benefit Account provided for such
Executive and/or Beneficiary under this Agreement.
11.6 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Agreement, no individual acting as an employee or
agent of the Bank, or as a member of the Board of Directors shall be
personally liable to the Executive or any other person for any claim,
loss, liability or expense incurred in connection with the Agreement.
11.7 Gender. Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
11.8 Effect on Other Corporate Benefit Agreements. Nothing contained in
this Agreement shall affect the right of the Executive to participate
in or be covered by any qualified or non-qualified pension, profit
sharing, group, bonus or other supplemental compensation or fringe
benefit agreement constituting a part of the Bank's existing or future
compensation structure.
11.9 Suicide. Notwithstanding anything to the contrary in this Agreement,
if the Executive's death results from suicide, whether sane or insane,
within twenty-six (26) months after execution of this Agreement, all
further Contributions to the Retirement Income Trust Fund (or Phantom
Contributions recorded in the Accrued Benefit Account) shall thereupon
cease, and no Contribution (or Phantom Contribution) shall be made by
the Bank to the Retirement Income Trust Fund (or recorded in the
Accrued Benefit Account) in the year such death resulting from suicide
occurs (if not yet made). All benefits other than those available from
previous Contributions to the Retirement Income Trust Fund under this
Agreement shall be forfeited, and this Agreement shall become null and
void. The balance of the Retirement Income Trust Fund, measured as of
the Executive's date of death, shall be paid to the Beneficiary within
thirty (30) days of the date the Administrator receives notice of the
Executive's death.
11.10 Inurement. This Agreement shall be binding upon and shall inure to the
benefit of the Bank, its successors and assigns, and the Executive,
his successors, heirs, executors, administrators, and Beneficiaries.
11.11 Headings. Headings and sub-headings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part of this
Agreement.
11.12 Establishment of a Rabbi Trust. The Bank shall establish a rabbi trust
into which the Bank shall contribute assets which shall be held
therein, subject to the claims of the Bank's creditors in the event of
the Bank's "Insolvency" (as defined in such rabbi trust agreement),
until the contributed assets are paid to the Executive and/or his
Beneficiary in such manner and at such times as specified in this
Agreement. It is the intention of the Bank that the contribution or
contributions to the rabbi trust shall provide the Bank with a source
of funds to assist it in meeting the liabilities of this Agreement.
11.13 Source of Payments. All payments provided in this Agreement shall be
timely paid in cash or check from the general funds of the Bank or the
assets of the rabbi trust, to the extent made from the Accrued Benefit
Account. The Holding Company, however guarantees payment and provision
of all amounts and benefits due to the Executive from the Accrued
Benefit Account or Contribution to the Retirement Income Trust Fund
and, if such Contributions, amounts and benefits due from the Bank are
not timely paid or provided by the Bank, such amounts and benefits
shall be paid or provided by the Holding Company.
SECTION XII
AMENDMENT/PLAN TERMINATION
12.1 Amendment or Plan Termination. The Bank intends this Agreement to be
permanent, but reserves the right to amend or terminate the Agreement
when, in the sole opinion of the Bank, such amendment or termination
is advisable. However, any termination of the Agreement which is done
in anticipation of or pursuant to a "Change in Control", as defined in
Subsection 1.9, shall be deemed to trigger Subsection 2.1(b)(2) (or
2.1(c)(2), as applicable) of the Agreement notwithstanding the
Executive's continued employment, and benefit(s) shall be paid from
the Retirement Income Trust Fund (and Accrued Benefit Account, if
applicable) in accordance with Subsection 13.2 below and with
Subsections 2.1(b)(2) (or 2.1(c)(2), as applicable). Any amendment or
termination of the Agreement by the Bank shall be made pursuant to a
resolution of the Board of Directors of the Bank and shall be
effective as of the date of such resolution. No amendment or
termination of the Agreement by the Bank shall directly or indirectly
deprive the Executive of all or any portion of the Executive's
Retirement Income Trust Fund (and Accrued Benefit Account, if
applicable) as of the effective date of the resolution amending or
terminating the Agreement.
Notwithstanding the above, if the Executive does not exercise any
withdrawal rights pursuant to Subsection 2.2, and if at any time after
the final Contribution is made to the Retirement Income Trust Fund the
Executive elects to terminate the Retirement Income Trust Fund and
receive a distribution of the assets of the Retirement Income Trust
Fund, then upon such distribution this Agreement shall terminate.
12.2 Executive's Right to Payment Following Plan Termination. In the event
of a termination of the Agreement, the Executive shall be entitled to
the balance, if any, of his Retirement Income Trust Fund (and Accrued
Benefit Account, if applicable). However, if such termination is done
in anticipation of or pursuant to a "Change in Control," such
balance(s) shall include the final Contribution (or final Phantom
Contribution) made (or recorded) pursuant to Subsection 2.1(b)(2) (or
2.1(c)(2)). Payment of the balance(s) of the Executive's Retirement
Income Trust Fund (and Accrued Benefit Account, if applicable) shall
not be dependent upon his continuation of employment with the Bank
following the termination date of the Agreement. Payment of the
balance(s) of the Executive's Retirement Income Trust Fund (and
Accrued Benefit Account, if applicable) shall be made in a lump sum
within thirty (30) days of the date of termination of the Agreement.
SECTION XIII
EXECUTION
13.1 This Agreement and the Charles W. Smith Grantor Trust agreement set
forth the entire understanding of the parties hereto with respect to
the transactions contemplated hereby, and any previous agreements or
understandings between the parties hereto regarding the subject matter
hereof are merged into and superseded by this Agreement and the
Charles W. Smith Grantor Trust agreement.
13.2 This Agreement shall be executed in triplicate, each copy of which,
when so executed and delivered, shall be an original, but all three
copies shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the Bank and the Executive have caused this
Agreement to be executed on the day and date first above written.
ATTEST: GRANITE BANK:
By: /s/ William Smedley
_____________________________
/s/ Charles B. Paquette Chairman, Personnel Committee
_____________________________ _____________________________
Secretary (Title)
ATTEST: GRANITE STATE BANKSHARES, INC.
/s/ Charles B. Paquette By: /s/ William Smedley
_____________________________ _____________________________
Secretary
Chairman, Personnel Committee
_____________________________
(Title)
WITNESS: EXECUTIVE:
/s/ Stacey W. Cole /s/ Charles W. Smith
_____________________________ ____________________________
CONDITIONS, ASSUMPTIONS,
AND
SCHEDULE OF CONTRIBUTIONS AND PHANTOM CONTRIBUTIONS
1. Interest Factor - for purposes of:
a. the Accrued Benefit Account - shall be Six percent (6%) per
annum, compounded monthly.
b. the Retirement Income Trust Fund - for purposes of annuitizing
the balance of the Retirement Income Trust Fund over the Payout
Period, the trustee of the Charles W. Smith Grantor Trust shall
exercise discretion in selecting the appropriate rate given the
nature of the investments contained in the Retirement Income
Trust Fund and the expected return associated with the
investments.
2. The amount of the annual Contributions (or Phantom Contributions) to
the Retirement Income Trust Fund (or Accrued Benefit Account) has been
based on the annual incremental accounting accruals which would be
required of the Bank through the earlier of the Executive's death or
Retirement Age, (i) pursuant to APB Opinion No. 12, as amended by FAS
106 and (ii) assuming a discount rate equal to Six percent (6%) per
annum, in order to provide the unfunded, non-qualified Supplemental
Retirement Income Benefit.
3. Supplemental Retirement Income Benefit means an actuarially determined
annual amount equal to One Hundred Eighty Four Thousand Seven Hundred
Ninety Seven Dollars ($184,797.00) at age 62.
The Supplemental Retirement Income Benefit:
* the definition of Supplemental Retirement Income Benefit has
been incorporated into the Agreement for the sole purpose of
actuarially establishing the amount of annual Contributions (or
Phantom Contributions) to the Retirement Income Trust Fund (or
Accrued Benefit Account). The amount of any actual retirement,
pre-retirement or disability benefit payable pursuant to the
Agreement will be a function of (i) the amount and timing of
Contributions (or Phantom Contributions) to the Retirement
Income Trust Fund (or Accrued Benefit Account) and (ii) the
actual investment experience of such Contributions (or the
monthly compounding rate of Phantom Contributions).
Exhibit A
4. Schedule of Annual Gross Contributions/Phantom Contributions
Plan Year Amount
1996 $358,748
1997 256,873
1998 256,873
1999 256,873
2000 256,873
2001 256,873
2002 256,873
2003 256,873
2004 256,873
2005 256,873*
2006 256,873**
2007 256,873**
2008 256,873**
* If retirement occurs at age 62, the contribution for Plan Year 2005
would be $161,869.
** Contributions/Phantom Contributions for the years 2005, 2006, and 2007
shall only be required if Executive actually continues in the
employment of the Bank during those years and shall not be required if
Executive's employment terminates prior to such years due to
retirement, death, disability, a Change in Control of the Bank or
Holding Company, or other voluntary or involuntary termination of
employment.
Exhibit A - Cont'd.
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
BENEFICIARY DESIGNATION
The Executive, under the terms of the Executive Supplemental
Retirement Income Agreement executed by the Bank, dated the 12th day of
August, 1996, hereby designates the following Beneficiary(ies) to receive
any guaranteed payments or death benefits under such Agreement, following
his death:
PRIMARY BENEFICIARY: Bankers Trust Company and Tara Smith, as
successor co-trustees of the Charles William
Smith Trust executed on the 25th day
of March, 1996.
SECONDARY BENEFICIARY: __________________________________
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable.
DATE: December 16, 1996
/s/ Stacey W. Cole /s/ Charles W. Smith
_____________________________ ______________________________
(WITNESS) EXECUTIVE
/s/ William Smedley
_____________________________
(WITNESS)
Exhibit B
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
NOTICE OF ELECTION TO CHANGE FORM OF PAYMENT
TO: Bank
Attention:
I hereby give notice of my election to change the form of payment of
my Supplemental Retirement Income Benefit, as specified below. I understand
that such notice, in order to be effective, must be submitted in accordance
with the time requirements described in my Executive Supplemental Retirement
Income Agreement.
[ ] I hereby elect to change the form of payment of my benefits from
monthly installments throughout my Payout Period to a lump sum benefit
payment.
[ ] I hereby elect to change the form of payment of my benefits from a
lump sum benefit payment to monthly installments throughout my Payout
Period. Such election hereby revokes my previous notice of election to
receive a lump sum form of benefit payments.
______________________________
Executive
______________________________
Date
Acknowledged
By: __________________________
Title: _______________________
______________________________
Date
Exhibit C
EXHIBIT 11
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
Exhibit 11 Calculations of Basic Earnings Per Share
and Diluted Earnings Per Share
($ In Thousands, Except Per Share Amounts)
1997 1996 1995
-------- -------- --------
Net earnings $ 2,307 $ 7,201 $ 2,482
Adjustments 0 0 0
------- ------- -------
Earnings applicable to
common stock $ 2,307 $ 7,201 $ 2,482
======= ======= =======
Weighted-average common
shares outstanding-basic 5,444,350 5,323,480 5,411,409
Dilutive effect of stock
options computed using
the treasury stock method 306,912 291,074 267,402
--------- --------- ---------
Weighted-average common
shares outstanding-diluted 5,751,262 5,614,554 5,678,811
========= ========= =========
Basic Earnings Per Share $ 0.42 $ 1.35 $ 0.46
======== ======== ========
Diluted Earnings Per Share $ 0.40 $ 1.28 $ 0.44
======== ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Granite State Bankshares, Inc. ("Granite State" or the "Company") is a
single-bank holding company which owns all of the stock of the Granite Bank
(the "subsidiary bank"), a New Hampshire chartered commercial bank. The
Company has grown profitably over the past several years through several
strategic acquisitions and by leveraging its capital. This activity
strengthened the franchise and assisted in the transition from a thrift
institution into a full-service commercial bank. This discussion of the
financial condition and results of operations of the Company should be read
in conjunction with the financial statements and supplemental financial data
contained elsewhere in this report.
The subsidiary bank has been and continues to be a community oriented
commercial bank offering a variety of financial services. The principal
business of the subsidiary bank consists of attracting deposits from the
general public and underwriting loans secured by residential and commercial
real estate and other loans. The subsidiary bank also originates fixed rate
residential real estate loans for sale in the secondary mortgage market. The
subsidiary bank has twenty full service offices and an additional twenty
remote automatic teller locations. The subsidiary bank is a full service
community bank with a diversified lending operation that services Cheshire,
Hillsborough, Merrimack, Strafford and Rockingham counties, New Hampshire.
The subsidiary bank's deposits are primarily insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
("FDIC"), with the remaining portion of the subsidiary bank's deposits
(approximately 6.30% of total deposits at December 31, 1997) being OAKAR
deposits, which are deposits purchased from institutions previously insured
by the Savings Association Insurance Fund ("SAIF") of the FDIC. These
deposits are still insured by the SAIF. As a result of the foregoing, the
subsidiary bank is subject to regulation by the FDIC. The Company, as a bank
holding company, is subject to regulation by the Federal Reserve Board
("FRB").
Financial institutions in general, including the Company, are
significantly affected by economic conditions, competition and the monetary
and fiscal policies of the Federal government. Lending activities are
influenced by the demand for and supply of housing and local economic
activity, competition among lenders, the interest rate conditions and funds
availability. Deposit balances and cost of funds are influenced by
prevailing market rates on competing investments, customer preference and
the levels of personal income and savings in the subsidiary bank's primary
market area.
The Company has made, and may continue to make, various forward-
looking statements with respect to earnings per share, cost savings related
to acquisitions, credit quality and other financial matters for 1998 and in
certain instances, subsequent periods. The Company cautions that these
forward-looking statements are subject to numerous assumptions, risks and
uncertainties, and that statements for periods subsequent to 1997 are
subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements. In addition to those factors
previously disclosed by the Company and those factors identified elsewhere
herein, the following factors could cause actual results to differ
materially from such forward-looking statements: continued pricing pressure
on loans and deposit products, actions of competitors, changes in economic
conditions, the extent and timing of actions of the Federal Reserve,
customers' acceptance of the Company's products and services and the extent
and timing of legislative and regulatory actions and reforms. The Company's
forward-looking statements speak only as of the date on which such
statements are made. By making forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated
events or circumstances.
Acquisition
Effective after the close of business October 31, 1997, the Company
acquired Primary Bank. Each of Primary Bank's 2,194,685 outstanding shares
of common stock were converted into 1.1483 shares of the Company's common
stock resulting in the issuance of 2,520,157 shares of the Company's common
stock to Primary Bank stockholders. Primary Bank was a state-chartered
guaranty (stock) savings bank with total assets of $388 million,
headquartered in Peterborough, New Hampshire. Primary Bank was merged into
Granite Bank, the Company's wholly-owned subsidiary, as part of the
transaction.
The transaction was accounted for by the pooling-of-interests method
of accounting, and, accordingly, the consolidated financial statements for
all prior periods presented have been restated to present the combined
financial condition and results of operations as if the combination had been
in effect for all periods presented. For a presentation of summarized
separate financial information of Granite State and Primary Bank for periods
prior to the acquisition, refer to note B of Notes to Consolidated Financial
Statements. The acquisition provides an expanded penetration of the Company
into commercial and industrial lending and serves to connect existing branch
facilities in southwestern, central and southeastern New Hampshire. Expenses
directly attributable to the merger amounted to $5,917,000 and were charged
to earnings at the date of combination. These expenses are described in
detail in the noninterest expense por-
<PAGE> 11
tion of the results of operations section of this Management's Discussion
and Analysis. Management anticipates that significant cost savings will be
realized in 1998 and thereafter as a result of the merger, which cost savings
could approximate $6.0 million on an annualized basis, of which a substantial
portion could be realized in 1998.
Stock Split
On April 14, 1997, the Board of Directors declared a three-for-two
split of the Company's common stock, effected in the form of a 50% stock
dividend paid on May 9, 1997 to stockholders of record on April 25, 1997. An
amount equal to the par value of the shares issued was transferred from
additional paid-in capital to the common stock account. All references to
the number of shares, except shares authorized, and to the per share
information in the consolidated financial statements and this Management's
Discussion and Analysis have been adjusted to reflect the stock split on a
retroactive basis.
FINANCIAL CONDITION
Consolidated assets at December 31, 1997 were $813.7 million, up $15.9
million or 1.98% from $797.8 million at December 31, 1996.
Interest Bearing Deposits in the Federal Home Loan Bank of Boston
Interest bearing deposits in the Federal Home Loan Bank of Boston
("FHLBB") were $27.5 million at December 31, 1997 and $18.0 million at
December 31, 1996. Such investments are short-term overnight investments 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 securities available for sale, and as
balances of interest bearing liabilities such as deposits, securities sold
under agreements to repurchase and other borrowings fluctuate. These
instruments are also used to fund cash and due from bank requirements.
Securities Held to Maturity and Securities Available for Sale
The Company classifies its investments in debt and equity securities
as securities held to maturity, securities available for sale or trading
securities. Securities held to maturity are carried at amortized cost,
securities available for sale are carried at market value with unrealized
gains and losses shown as a component of stockholders' equity, net of
related tax effects, and trading securities are carried at market value with
unrealized gains and losses reflected in earnings. The Company had no
securities classified as trading securities during 1997, 1996 or 1995. At
December 31, 1997 and 1996 the carrying values of securities held to
maturity and securities available for sale consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
Securities held to maturity
US Government agency obligations $ 33,910 $ 67,711
Mortgage-backed securities 16,692
----------------------
Total securities held to maturity $ 33,910 $ 84,403
======================
Securities available for sale
US Treasury obligations $ 82,969 $ 25,852
US Government agency obligations 44,199 65,345
Other corporate obligations 8,508 6,436
Mortgage-backed securities 21,508 68,800
Mutual funds 6,113 5,423
Marketable equity securities 15,383 10,606
----------------------
Total securities available for sale $ 178,680 $ 182,462
======================
</TABLE>
At December 31, 1997 the net unrealized gains on securities available
for sale, net of related tax effects were $5.7 million, compared to $1.6
million at December 31, 1996. These net unrealized gains are shown as a
separate component of stockholders' equity.
As a result of the Company's acquisition of Primary Bank after the
close of business October 31, 1997, and to be consistent with the Company's
existing interest rate risk profile, securities held to maturity, with an
amortized cost of $22.2 million and a net unrealized loss of $156 thousand
were transferred to securities available for sale.
The weighted average maturity for all debt securities held to maturity
and available for sale, excluding mortgage-backed securities, is 42 months.
Actual maturities may differ from contractual maturities because certain
issuers have the right to call obligations without call penalties. The
weighted average maturity of mortgage-backed securities available for sale
is 302 months, based upon their final maturities. However, normal principal
repayments and prepayments of mortgage-backed securities are received
regularly, substantially reducing their weighted-average maturities.
<PAGE> 12
The decrease in securities held to maturity and securities available
for sale were used to partially fund loan growth, and to repay other
borrowings with the FHLBB.
Loans
The subsidiary bank originates fixed rate residential loans for sale
in the secondary mortgage market. Mortgage loans held for sale at December
31, 1997 and 1996 were $1.1 million and $1.0 million, respectively. Loans
originated for sale in the secondary mortgage market during 1997 and 1996
were $26.4 million and $27.2 million, respectively. Loans sold in the
secondary mortgage market were $26.4 million and $28.2 million,
respectively. The Company began originating fifteen year fixed rate loans
for portfolio effective July 1, 1996. Such loans had previously been sold in
the secondary mortgage market. The Company continues to write thirty year
fixed rate loans for sale in the secondary mortgage market. At December 31,
1997 and 1996 the Company serviced loans for others totaling $163.9 million
and $174.0 million, respectively.
Loans outstanding before deductions for unearned income and the
allowance for possible loan losses increased $66.9 million or 15.12% to
$509.2 million at December 31, 1997 from $442.3 million at December 31,
1996. Residential real estate loans and commercial real estate loans were
the areas where the most significant increases occurred. Residential real
estate loans increased $44.6 million or 22.19% to $245.6 million at December
31, 1997 from $201.0 million at December 31, 1996 and commercial real estate
loans increased $12.1 million or 8.66% to $151.5 million at December 31,
1997 from $139.4 million at December 31, 1996. The increase in the
residential real estate loans occurred throughout 1997 as the low interest
rate environment during 1996 continued throughout 1997 and encouraged
borrowers to refinance loans. New home purchases were also stronger in 1997
than during 1996. Additionally, beginning on July 1, 1996, the Company began
writing fifteen year fixed rate loans for portfolio, which before that date
were being sold into the secondary mortgage market. The increase in
commercial real estate loans was a result of stronger loan demand in 1997,
compared to 1996, as the competitive loan rate environment continued to
encourage borrowers to refinance their loans. Increases in commercial,
financial and agricultural loans, and other loans, although not as
significant as residential and commercial real estate loans, were also the
result of the favorable interest rate environment during 1997 compared to
1996. Total loan originations during 1997 and 1996, were $248.1 million and
$213.5 million, respectively. Loan originations for portfolio, excluding
loans originated for sale in the secondary mortgage market during 1997 and
1996 were $221.7 million and $186.3 million, respectively. Loan repayments
for 1997 and 1996, were $153.1 million and $145.0 million, respectively.
Loans charged off, net during 1997 and 1996 were $1.0 million and $2.3
million, respectively. Loans transferred to other real estate owned during
1997 and 1996 amounted to $732 thousand and $2.9 million, respectively.
At December 31, 1997 and 1996 the Company's loan portfolio consisted
of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 68,513 $ 63,543
Real estate-residential 245,577 200,983
Real estate-commercial 151,474 139,400
Real estate-construction and land development 6,000 5,355
Installment 11,588 12,076
Other 26,013 20,940
----------------------
Total loans 509,165 442,297
Less:
Unearned income (1,432) (1,860)
Allowance for possible loan losses (7,651) (6,253)
----------------------
Net loans $ 500,082 $ 434,184
======================
</TABLE>
Risk Elements
The Company's nonperforming assets increased $1.5 million or 19.42%
from $7.6 million at December 31, 1996 to $9.1 million at December 31, 1997.
The increase in nonperforming assets relates primarily to increases in
nonperforming commercial real estate and commercial, financial and
agricultural loans of $4.0 million and an increase in nonperforming
installment and other loans of $306 thousand, partially offset by a decrease
in nonperforming residential real estate loans of $1.2 million and a
decrease in other real estate owned of $1.6 million. The increase in
nonperforming commercial real estate and commercial, financial and
agricultural loans relate primarily to four loan relationships that are in
various stages of being resolved. Management believes that no significant
losses will occur with respect to these loans that have not been provided
for.
Although the New Hampshire economy and the real estate market in the
Company's market areas have stabilized and improved over the last 4 to 5
years, any future deterioration in the economy or real estate market in the
Company's market areas may adversely impact the quality of the Company's
assets in future periods, as well as its results of operations.
<PAGE> 13
The following table sets forth the Company's nonperforming loans and
other real estate owned at the dates indicated. The Company generally does
not accrue interest on any loans that are 90 days or more past due, unless
the loan is well secured and in the process of collection. At the dates
indicated, all loans delinquent 90 days or more were on nonaccrual status
and therefore considered nonperforming, with the exception of $535 thousand
of loans at December 31, 1997 and $93 thousand of loans at December 31,
1996, all of which were in the process of collection at those dates.
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996 1995
-------- -------- ---------
($ In Thousands)
<S> <C> <C> <C>
Nonperforming loans:
Residential real estate $ 1,489 $ 2,707 $ 4,231
Commercial real estate 4,261 1,032 2,106
Construction and land development real estate 92 102 444
Commercial, financial and agricultural 956 204 670
Installment and other 347 41 256
--------------------------------
Total nonperforming loans 7,145 4,086 7,707
Total other real estate owned 1,905 3,492 4,779
--------------------------------
Total nonperforming assets $ 9,050 $ 7,578 $ 12,486
================================
Ratios:
Total nonperforming loans to total loans 1.40% 0.92% 1.81%
================================
Total nonperforming assets to total assets 1.11% 0.95% 1.71%
================================
</TABLE>
The Company measures loan impairment based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
or based on a loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. The Company measures
impairment based on the fair value of the collateral when it is determined
that foreclosure is probable. The balance of impaired loans was $4.6 million
and $2.7 million, respectively, at December 31, 1997 and 1996. The Company
has identified a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the
loan agreements. The allowance for possible loan losses associated with
impaired loans allocated from and part of the general allowance for possible
loan losses, upon the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 114, on January 1, 1995 was $1.3 million. During
1997, 1996 and 1995, provisions to the allowance for impaired loans amounted
to $983 thousand, $499 thousand and $1.2 million, respectively, and impaired
loans charged off amounted to $386 thousand, $1.2 million and $1.4 million,
respectively. The allowance for possible loan losses associated with
impaired loans at December 31, 1997 and 1996 was $1.1 million and $457
thousand, respectively. At December 31, 1997 and 1996, there were no
impaired loans which did not have an allowance for possible loan losses
determined in accordance with SFAS No. 114. The average recorded investment
in impaired loans was $3.0 million, $3.9 million and $5.8 million,
respectively, in 1997, 1996 and 1995 and the income recognized on impaired
loans during 1997, 1996 and 1995 was $0, $4 thousand and $19 thousand,
respectively. Total cash collected on impaired loans during 1997, 1996 and
1995 was $779 thousand, $2.4 million and $484 thousand, respectively, of
which $779 thousand, $2.4 million and $465 thousand, respectively, was
credited to the principal balance outstanding on such loans. The Company's
policy for interest income recognition on impaired loans is to recognize
income on nonaccrual loans under the cash basis when the loans are both
current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Company; if these factors do not exist, the
Company does not recognize income.
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real
estate acquired in settlement of loans is recorded at the lower of the
carrying value of the loan or the fair value of the property received less
an allowance for estimated costs to sell. Loan losses arising from the
acquisition of such properties are charged against the allowance for
possible loan losses. Provisions to reduce the carrying value to net
realizable value are charged to current period earnings as realized and
reflected as an additional valuation allowance. Operating expenses and gains
and losses upon disposition are reflected in earnings as realized. Other
real estate owned amounted to $1.9 million and $3.5 million at December 31,
1997 and 1996, respectively. See note I of Notes to Consolidated Financial
Statements for further information on other real estate owned.
The allowance for possible loan losses is a significant factor in the
Company's operating results and is established through charges against
earnings and is maintained at a level considered adequate to provide for
potential loan losses based on management's evaluation of known and inherent
risks in the loan portfolio. When a loan, or a portion of a loan, is
considered uncollectible it is charged against the allowance. Recoveries of
loans previously charged off are credited to the allowance when received.
Management's evaluation of the allowance is based on a continuing
review of the loan portfolio, which encompasses many factors, including
identification and review of individual problem situations that may affect
the borrower's
<PAGE> 14
ability to repay; review of overall portfolio quality through an analysis of
current charge off, delinquency, and nonperforming loan data; review of
regulatory authority examinations and evaluations of loans; an assessment of
current and expected economic conditions and changes in the size and
character of the loan portfolio.
At December 31, 1997, 1996 and 1995, the allowance for possible loan
losses was $7.7 million, $6.3 million and $7.2 million, respectively, and
the ratio of the allowance to total loans outstanding was 1.50%, 1.41% and
1.68%, respectively. At December 31, 1997, 1996 and 1995, the allowance for
possible loan losses represented 107.1%, 153.0% and 92.8%, respectively, of
nonperforming loans.
Management monitors the allowance for possible loan losses in light of
existing nonperforming loans, impaired loans and trends in the New England
real estate market and local economy. While management believes that the
allowance for possible loan losses at December 31, 1997 is adequate based on
its current review and estimate, further provisions to the allowance may be
necessary if the market in which the Company operates deteriorates.
Additionally, regulatory agencies review the Company's allowance for
possible loan losses as part of their examination process. Such agencies may
require the Company to recognize additions to the allowance based on
judgments which may be different from those of management.
Deposits
A summary of deposits at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
NOW and Super NOW accounts $ 166,773 $ 150,485
Savings accounts 89,278 87,676
Money market deposit accounts 31,486 37,510
Time certificates 290,176 270,725
----------------------
Total interest bearing deposits 577,713 546,396
Noninterest bearing deposits 71,270 63,271
----------------------
Total deposits $ 648,983 $ 609,667
======================
</TABLE>
Total deposits increased by $39.3 million, or 6.45% during 1997. NOW
and super NOW accounts increased $16.3 million during 1997, as the NOW
account product which the subsidiary bank introduced in 1995 continued its
success. Competitive rates offered by the subsidiary bank for fixed rate
time certificates were attractive to our customers and time certificates
increased by $19.5 million during 1997. Noninterest bearing deposits
increased $8.0 million during 1997 and was the result of a greater emphasis
by the Company in obtaining commercial customers on the deposit side as well
as the lending side of the business. Savings accounts increased $1.6 million
during 1997 while money market demand deposits decreased $6.0 million, as
customers with money market accounts invested in higher yielding
instruments. The deposit increases mentioned above were also the result of a
de novo branch opened in Merrimack, New Hampshire in February 1997, and the
continued success of the de novo branch opened in downtown Portsmouth, New
Hampshire in April of 1996 that was operational for the full year in 1997.
Deposit increases were used to fund loan growth.
Time certificates with minimum balances of $100 thousand increased
$7.5 million, from $29.9 million at December 31, 1996 to $37.4 million at
December 31, 1997. The Company does not use brokers to solicit deposits.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase increased $1.0 million
or 1.64% to $66.0 million at December 31, 1997 from $65.0 million at
December 31, 1996. The increase in securities sold under agreements to
repurchase was used to fund loan growth.
Other Borrowings
Other borrowings consisted of borrowings from the FHLBB and amounted
to $25.9 million at December 31, 1997 and $59.2 million at December 31,
1996. The decrease in other borrowings during 1997 was funded by proceeds
from decreases in securities held to maturity and securities available for
sale.
Stockholders' Equity
Stockholders' equity was $66.9 million at December 31, 1997, an
increase of $7.5 million from $59.4 million at December 31, 1996. Book value
per share was $12.01 at December 31, 1997, up $0.93 or 8.39% from $11.08 at
December 31, 1996. See "Capital Resources and Liquidity" for further
information on stockholders' equity.
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The Company's primary objective regarding asset/liability management
is to position the Company so that changes in interest rates do not have a
materially adverse impact upon forecasted net earnings and the net fair
value of the Company. The Company's primary strategy for accom-
<PAGE> 15
plishing its asset/liability management objective is achieved by matching
the weighted average maturities of assets, liabilities and off-balance-sheet
items (duration matching). At December 31, 1997, approximately 76% of the
Company's loan portfolio was comprised of adjustable rate loans.
Approximately 72% of its securities available for sale and securities held
to maturity portfolios are debt securities maturing in less than five years.
With regard to deposit liabilities, only 45% of total deposits and 50% of
interest bearing deposits are made up of time certificates. Unlike other
deposit products such as NOW, money market deposit and savings accounts,
time certificates carry a high degree of interest rate sensitivity and
therefore their renewal will vary based on the competitiveness of the
Company's interest rates. The Company has also entered into interest rate
cap agreements to manage its exposure to interest rate risk. The Company
receives an interest payment if the three-month London Interbank Offer Rate
("LIBOR") increases above a predetermined rate (strike rate). At December
31, 1997 the Company had interest rate cap agreements in effect with
notional amounts of $20.0 million with a weighted average strike rate of
7.77%, which mature in the year 2004.
To measure the impact of interest rate changes, the Company utilizes a
comprehensive financial planning model that recalculates the fair value of
the Company assuming instantaneous, permanent parallel shifts in the yield
curve of both up and down 100 and 200 basis points, or four separate
calculations. Larger increases or decreases in forecasted net earnings and
the net market value of the Company as a result of these interest rate
changes represent greater interest rate risk than do smaller increases or
decreases.
The results of the financial planning model are highly dependent on
numerous assumptions. These assumptions generally fall into two categories:
those relating to the interest rate environment and those relating to
general business and economic factors. Assumptions related to the interest
rate environment include the prepayment speeds on mortgage-related assets
and the cash flows and maturities of financial instruments. Assumptions
related to general business and economic factors include changes in market
conditions, loan volumes and pricing, deposit sensitivity, customer
preferences, competition, and management's financial and capital plans. The
assumptions are developed based on current business and asset/liability
management strategies, historical experience, the current economic
environment, forecasted economic conditions and other analyses. These
assumptions are inherently uncertain and subject to change as time passes.
Accordingly, the Company adjusts the pro forma net earnings and net fair
values as it believes appropriate on the basis of historical experience and
prudent business judgment. The Company endeavors to maintain a position
where it experiences no material changes in net fair value and no material
fluctuation in forecasted net earnings as a result of assumed 100 and 200
basis point increases and decreases in interest rates. However, there can be
no assurances that the Company's projections in this regard will be
achieved.
Management believes that the above method of measuring and managing
interest rate risk is consistent with the FDIC regulation regarding an
interest rate risk component of regulatory capital.
The following table summarizes the timing of the Company's anticipated
maturities or repricing of and interest rates applicable to rate-sensitive
assets and rate-sensitive liabilities as of December 31, 1997. The table
also reflects the total estimated fair values for each category of rate-
sensitive assets and rate-sensitive liabilities. This table has been
generated using certain assumptions which the Company believes fairly and
accurately represent repricing volumes in a dynamic interest rate
environment. Adjustable rate loans are reflected in periods in which they
reprice, and fixed rate loans are shown in accordance with their contractual
maturities (scheduled amortization). The earlier of contractual maturities
or the next repricing date are used on all securities. The gap maturity
categories for savings deposits (including NOW, savings, and money market
accounts) are allocated based on the Company's historical experience in
retaining such deposits in changing interest rate environments, as well as
management's philosophy of repricing core deposits in reaction to changes in
the interest rate environment. Time deposits are reflected at the earlier of
contractual maturities or their next repricing date. Repricing frequencies
will vary at different points in the interest cycle and as supply and demand
for credit change.
Nonperforming loans totaling $7.1 million have been excluded from this
analysis.
<PAGE> 16
INTEREST RATE SENSITIVITY GAP ANALYSIS
at December 31, 1997
<TABLE>
<CAPTION>
Sensitivity Period
--------------------------------------------------------------------------------
0-6 6 Months- 1-3 3-5 Over Fair
Months 1 Year Years Years 5 Years Total Value
--------- --------- --------- -------- --------- --------- ---------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive Assets:
Interest bearing deposits in FHLBB $ $ 27,452 $ 27,452 $ 27,452
Rate 5.25% 5.25%
Securities, including stock in FHLBB $ 9,456 $ 11,358 $ 103,428 $ 34,288 $ 61,261 219,791 220,051
Rate 6.16% 6.23% 6.04% 6.54% 6.63% 6.28%
Loans and loans held for sale $ 185,974 99,721 101,126 45,314 70,953 503,088 503,387
Rate 9.40% 8.91% 8.34% 8.93% 7.81% 8.62%
--------------------------------------------------------------------------------
Total $ 222,882 $ 111,079 $ 204,554 $ 79,602 $ 132,214 $ 750,331 $ 750,890
================================================================================
Rate-sensitive Liabilities:
Money Market Deposit Accounts $ $ 6,297 $ 9,446 $ 15,743 $ 31,486 $ 31,486
Rate 2.64% 2.64% 2.64% 2.64%
Savings and NOW Accounts $ 20,484 30,726 102,421 $ 51,210 $ 51,210 256,051 256,051
Rate 2.61% 2.61% 2.61% 2.61% 2.61% 2.61%
Time certificates $ 163,436 74,269 42,207 8,889 1,375 290,176 290,772
Rate 5.59% 5.70% 5.86% 5.82% 5.85% 5.67%
Securities sold under agreements to
repurchase and other borrowings $ 86,239 5,055 93 106 409 91,902 91,908
Rate 5.47% 6.20% 6.06% 6.06% 5.47% 5.51%
--------------------------------------------------------------------------------
Total $ 276,456 $ 119,496 $ 160,464 $ 60,205 $ 52,994 $ 669,615 $ 670,217
================================================================================
Period Sensitivity Gap $ (53,574) $ (8,417) $ 44,090 $ 19,397 $ 79,220 $ 80,716
Cumulative Sensitivity Gap $ (53,574) $ (61,991) $ (17,901) $ 1,496 $ 80,716 $ 80,716
Cumulative Sensitivity Gap as a Percent
of Total Assets (6.58)% (7.62)% (2.20)% 0.18% 9.92% 9.92%
</TABLE>
The ability to assess interest rate risk using gap analysis is
limited. Gap analysis does not capture the impact of cash flow or balance
sheet mix changes over a forecasted future period and it does not measure
the amount of price change expected to occur in the various asset and
liability categories. Thus, management does not use gap analysis exclusively
in its assessment of interest rate risk. The Company's interest rate risk
exposure is also measured by the forecasted net earnings and discounted cash
flow market value sensitivities referred to above.
The following table presents as of October 31, 1997, the Company's
most recent quarterly analysis of interest rate risk as measured by the
changes in the present value of equity for instantaneous and sustained
parallel shifts of 100 and 200 basis points in market interest rates.
<TABLE>
<CAPTION>
Change in $ Change in % Change in
Interest Rates Present Value of Equity Present Value of Equity
-------------- ----------------------- -----------------------
(Basis Points) ($ In Thousands)
<S> <C> <C>
+200 $ (6,439) (6.41)%
+100 (3,109) (3.09)
Flat Rate 0 0
-100 555 0.55
-200 (255) (0.25)
</TABLE>
Management believes that given the interest rate environment and the
stable mix of the Company's assets and liabilities between October 31, 1997
and December 31, 1997 that the above analysis would not be significantly
different from an analysis prepared as of December 31, 1997. Management also
believes that the assumptions utilized in evalu-
<PAGE> 17
ating the vulnerability of the Company's earnings and capital to changes in
interest rates approximate actual experience; however, the interest rate
sensitivity of the Company's assets and liabilities as well as the estimated
effect of changes in interest rates on the net present value of equity could
vary substantially if different assumptions are used or actual experience
differs from the experience on which the assumptions were based.
In the event the Company should experience a mismatch in its desired
GAP ranges or an excessive decline in its net present value of equity
subsequent to an immediate and sustained change in interest rates, it has a
number of options which it could utilize to remedy such mismatch. The
Company could restructure its available for sale securities portfolio
through sale or purchase of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate
maturities or repricing attributes, or it could attract deposits or obtain
borrowings with desired maturities.
RESULTS OF OPERATIONS
General
The operating results of the Company depend primarily on the net
interest and dividend income of its subsidiary bank, which is the difference
between interest and dividend income on interest earning assets, primarily
loans and securities, and interest expense on interest bearing liabilities,
primarily deposits and securities sold under agreements to repurchase and
other borrowings. The Company's operating results are also affected by the
level of its provision for possible loan losses, noninterest income,
noninterest expense, and income taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Earnings
Operations in 1997 resulted in net earnings of $2.3 million, a
decrease of $4.9 million over net earnings of $7.2 million for 1996. Basic
earnings per share was $.42 in 1997 compared to $1.35 in 1996. Diluted
earnings per share was $.40 in 1997 compared to $1.28 in 1996.
Earnings before income taxes were $3.0 million in 1997, a decrease of
$5.9 million compared to earnings before income taxes of $8.9 million in
1996. Earnings before income taxes decreased in 1997 compared to 1996,
primarily as a result of increases in noninterest expense (including merger-
related charges of $5.9 million) and the provision for possible loan losses,
partially offset by increases in net interest and dividend income and
noninterest income.
Net Interest and Dividend Income
Net interest and dividend income was $30.1 million and $27.2 million
in 1997 and 1996, respectively. The increase of $2.9 million in 1997
compared to 1996 relates to an increase of $45.2 million or 6.51% in average
interest earning assets to $740.2 million in 1997 from $695.0 million in
1996, coupled with an increase in the interest rate spread to 3.68% in 1997
from 3.55% in 1996.
Interest income on loans increased $4.3 million to $42.3 million in
1997 from $38.0 million in 1996. The increase was primarily the result of an
increase in the average loan balances of $51.4 million, or 12.14%, to $474.8
million in 1997 from $423.4 million in 1996, partially offset by a slight
decrease in average loan yields to 8.91% in 1997 from 8.97% in 1996. The
increase in average balances in the loan portfolio reflects the strong loan
demand during 1997, particularly with respect to residential and commercial
real estate loans. Competition for loans amongst financial institutions and
the continued low interest rate environment sparked loan demand and also
contributed to the slightly lower yields realized in 1997 compared to 1996.
Management expects that the competition for loans will continue, which could
reduce average yields realized on loans, thereby reducing the interest rate
spread in future periods.
Interest and dividend income on securities, including stock in FHLBB
increased $319 thousand to $15.9 million in 1997 from $15.6 million in 1996.
The increase related primarily to an increase in average yields to 6.35% in
1997 from 6.13% in 1996, partially offset by a decrease in average balances
of $3.8 million to $250.8 million in 1997 from $254.6 million in 1996. The
increase in yields was primarily the result of investing in securities with
longer weighted average maturities during 1996, thereby increasing yields in
1997, coupled with increased prepayment activity on mortgage-backed
securities in 1996, requiring an acceleration of the amortization of
premiums paid for such securities during 1996.
Interest expense on deposits increased $1.3 million to $23.3 million
in 1997 from $22.0 million in 1996, with interest on savings deposits
increasing $217 thousand and interest on time deposits increasing $1.1
million. The increase related primarily to an increase in average balances
of deposits of $30.7 million to $567.0 million in 1997 from $536.3 million
in 1996. Of this increase, average balances of savings deposits increased
$9.4 million and average balances of time deposits increased $21.3 million.
The average cost of deposits remained stable at 4.11% during 1997 compared
to 4.10% during 1996. The Company's subsidiary
<PAGE> 18
bank continued to offer competitive rates during 1997 on time deposits and
that coupled with the continued success of a NOW account product which was
first introduced by the subsidiary bank in 1995 were the primary reasons for
the increases in the average balances of time and savings deposits during 1997.
Interest expense on securities sold under agreements to repurchase and
other borrowings increased $334 thousand to $5.6 million in 1997 from $5.2
million in 1996. The increase was primarily related to an increase in
average balances of $6.8 million to $107.1 million in 1997 from $100.3
million in 1996, while the cost of these borrowings remained relatively
stable at 5.21% in 1997 compared to 5.23% in 1996. The increase in average
balances related to an increase in average balances on securities sold under
agreements to repurchase of $8.6 million, while average balances of other
borrowings decreased by $1.8 million. The increase of $8.6 million was
primarily the result of local municipalities and commercial accounts making
greater use of securities sold under agreements to repurchase in investing
their excess funds. The cost of securities sold under agreements to
repurchase was 4.76% in both 1997 and 1996, and the cost of other borrowings
was relatively stable, at 5.78% during 1997 and 5.72% during 1996.
Average Balance Sheets and Net Interest and Dividend Income
The following table presents, for the periods indicated, average
balances, the total dollar amount of interest and dividend income from
interest earning assets and their resultant yields, as well as the interest
expense on interest bearing liabilities, and their resultant costs:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ------ -------- -------- ------ -------- -------- ------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans and loans held for sale<F1> $474,844 $ 42,307 8.91% $423,421 $ 37,969 8.97% $419,533 $ 38,036 9.07%
Interest bearing deposits in FHLBB 14,570 781 5.36 16,956 857 5.05 17,062 961 5.63
Securities, including stock in FHLBB<F2> 250,783 15,923 6.35 254,599 15,604 6.13 216,167 12,801 5.92
------------------- ------------------- -------------------
Total interest earning assets 740,197 59,011 7.97 694,976 54,430 7.83 652,762 51,798 7.94
-------- -------- --------
Non-interest earning assets 72,400 66,828 56,278
Allowance for possible loan losses (6,594) (6,702) (6,921)
-------- -------- --------
Total assets $806,003 $755,102 $702,119
======== ======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities
Savings deposits $283,512 7,429 2.62 $274,136 7,212 2.63 $271,518 7,215 2.66
Time deposits 283,514 15,893 5.61 262,165 14,787 5.64 233,583 12,893 5.52
------------------- ------------------- -------------------
Total interest bearing deposits 567,026 23,322 4.11 536,301 21,999 4.10 505,101 20,108 3.98
Securities sold under agreements to
repurchase and other borrowings 107,062 5,578 5.21 100,304 5,244 5.23 85,682 4,910 5.73
------------------- ------------------- -------------------
Total interest bearing liabilities 674,088 28,900 4.29 636,605 27,243 4.28 590,783 25,018 4.23
-------- -------- --------
Non-interest bearing liabilities
Demand deposits 63,870 58,935 53,132
Other liabilities 3,368 3,669 3,731
-------- -------- --------
Total non-interest bearing liabilities 67,238 62,604 56,863
Stockholders' equity 64,677 55,893 54,473
-------- -------- --------
Total liabilities and stockholders'
equity $806,003 $755,102 $702,119
======== ======== ========
Net interest and dividend income/interest
rate spread $ 30,111 3.68% $ 27,187 3.55% $ 26,780 3.71%
======== ==== ======== ==== ======== ====
Net earning balance/net yield on interest
earning assets $ 66,109 4.07% $ 58,371 3.91% $ 61,979 4.10%
======== ==== ======== ==== ======== ====
<FN>
- -------------------
<F1> Loans on nonaccrual status are included in the average balances for
all periods presented.
<F2> The yield on securities, including stock in FHLBB is calculated
using interest and dividend income divided by the average balance of
the amortized historical cost.
</FN>
</TABLE>
<PAGE> 19
Rate Volume Analysis
The following table presents the dollar amount of changes in interest
and dividend income, interest expense and net interest and dividend income
which are attributable to changes in the average amounts of interest earning
assets and interest bearing liabilities and/or changes in rates earned or
paid thereon. The net changes attributable to both volume and rate have been
allocated proportionately.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 vs. 1996
Increase (Decrease) Due To
-----------------------------
Volume Rate Total
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Interest income on loans $ 4,591 $ (253) $ 4,338
Interest income on interest bearing deposits in FHLBB (136) 60 (76)
Interest and dividend income on securities and stock
in FHLBB (229) 548 319
-----------------------------
Total interest and dividend income 4,226 355 4,581
-----------------------------
Interest expense on deposits 1,269 54 1,323
Interest expense on securities sold under agreements
to repurchase and other borrowings 354 (20) 334
-----------------------------
Total interest expense 1,623 34 1,657
-----------------------------
Net interest and dividend income $ 2,603 $ 321 $ 2,924
=============================
<CAPTION>
Year Ended December 31,
1996 vs. 1995
Increase (Decrease) Due To
-----------------------------
Volume Rate Total
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Interest income on loans $ 353 $ (420) $ (67)
Interest income on interest bearing deposits in FHLBB (6) (98) (104)
Interest and dividend income on securities and stock
in FHLBB 2,337 466 2,803
------------------------------
Total interest and dividend income 2,684 (52) 2,632
------------------------------
Interest expense on deposits 1,271 620 1,891
Interest expense on securities sold under agreements
to repurchase and other borrowings 683 (349) 334
------------------------------
Total interest expense 1,954 271 2,225
------------------------------
Net interest and dividend income $ 730 $ (323) $ 407
==============================
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses was $2.4 million in 1997,
representing a $1.0 million or 76.75% increase from the provision of $1.4
million in 1996. The increase in the provision resulted primarily from the
increase in the loan portfolio as well as the increase in nonperforming
loans, and management's overall evaluation of the loan portfolio and the
adequacy of the level of the allowance for possible loan losses. Loans
charged off in 1997 were $1.2 million compared to $3.0 million in 1996.
Recoveries of loans previously charged off were $178 thousand in 1997
compared to $750 thousand in 1996. Net loans charged off were $1.0 million
in 1997 compared to $2.3 million in 1996.
Noninterest Income
Noninterest income was $7.1 million in 1997, an increase of $1.4
million or 23.87% compared to $5.7 million in 1996.
The increase in 1997 over 1996, was primarily attributable to an
increase in net gains on sales of securities available for sale of $1.5
million and an increase in other noninterest income of $321 thousand,
partially offset by a decrease in net gains on sales of loans of $383
thousand. The increase in net gains on sales of available for sale
securities was primarily the result of the Company selling certain of its
equity securities available for sale during the first quarter of 1997, based
on a perceived volatility in the stock markets. The increase in other
noninterest income related primarily to increases in fees associated with
nondeposit product sales and income from increases in the cash surrender
values of life insurance. The decrease in net gains on sales of
<PAGE> 20
loans was the result of an increase in the competitive environment for
residential mortgage products, resulting in the pricing of loans at lower
rates, thereby reducing gains on sales, as well as a decrease in loans sold in
the secondary mortgage market as a result of the Company originating fifteen
year fixed rate loans for its own portfolio beginning July 1, 1996, which
previously were being sold in the secondary mortgage market.
Noninterest Expense
Noninterest expense was $31.8 million in 1997, an increase of $9.2
million compared to $22.6 million in 1996. The increase was primarily
attributable to an increase in salaries and benefit expenses of $2.8 million
to $13.8 million in 1997 compared to $11.0 million in 1996 and merger related
costs of $5.9 million in 1997 compared to $0 in 1996.
The increase in salaries and benefits of $2.8 million was primarily
attributable to $1.1 million relating to compensation expense associated with
the vesting of performance based stock options in 1997, normal salary
increases of approximately 4.5%, additional staffing requirements, increased
costs associated with health insurance and retirement plans, increased costs
for commissions to loan originators and nondeposit product sales staff and
increases in bonuses paid to officers. The additional staffing requirements in
1997 were: for commercial lending and mortgage loan origination staff to
penetrate newer market areas, as well as to handle the significant loan
demand; for the Merrimack branch office opened in February of 1997; to bolster
the Company's information technology area; and for the human resource and
employee training areas.
In conjunction with the acquisition of Primary Bank after the close of
business October 31, 1997, the Company incurred costs of $5.9 million. These
charges were comprised of personnel costs of $1.5 million, data processing
costs of $1.3 million, facilities and equipment costs of $1.3 million and
other costs of $1.8 million. Personnel costs related primarily to the costs of
employee severance, data processing costs related primarily to the termination
of data processing contracts with outside service bureaus, facilities and
equipment costs related to the consolidation of certain back-office operations
and consist of writedowns of properties owned and writedowns and the
disposition of equipment which was unusable. Other merger expenses include
investment banking fees, legal and accounting fees, due diligence costs, proxy
registration/filing fees and mailing costs. All costs were recorded in
earnings in 1997.
The following table presents a summary of activity in 1997 with respect
to the merger accrual:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Balance at beginning of year $ 0
Provision charged against earnings 5,917
Cash outlays 2,999
Non-cash writedowns 1,305
-------
Balance at end of year $ 1,613
=======
</TABLE>
Of the remaining balance at year end, $1.3 million is for data
processing costs related primarily to the termination of data processing
contracts with outside service bureaus. At this time the Company anticipates
full use of the merger accrual based upon the identified cost of business
actions and existing contractual arrangements.
Income Taxes
Income tax expense decreased $1.0 million to $704 thousand in 1997
compared to $1.7 million in 1996 and represented effective tax rates of 23.4%
and 19.1%, respectively, of pretax income. The reason the tax rate is lower
than the statutory tax rate of 34% in 1997, relates primarily to the reversal
of the remainder of the valuation allowance established for net operating
losses as a result of current and projected earnings, partially offset by
nondeductible merger related charges and performance based stock options. The
reason the tax rate in 1996 is lower than the statutory rate of 34% relates
primarily to the reversal of a portion of the valuation allowance established
for net operating losses as a result of current and projected earnings.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Earnings
Operations in 1996 resulted in net earnings of $7.2 million, an increase
of $4.7 million over net earnings of $2.5 million for 1995. Basic earnings per
share was $1.35 in 1996 compared to $.46 in 1995. Diluted earnings per share
was $1.28 in 1996 compared to $.44 in 1995.
Earnings before income taxes were $8.9 million in 1996, an increase of
$4.8 million over $4.1 million in 1995. Earnings before income taxes increased
in 1996 compared to 1995, primarily as a result of increases in net interest
and dividend income and noninterest income and decreases in the provision for
possible loan losses and noninterest expense.
<PAGE> 21
Net Interest and Dividend Income
Net interest and dividend income was $27.2 million and $26.8 million in
1996 and 1995, respectively. The increase of $407 thousand in 1996 compared to
1995 relates to an increase of $42.2 million or 6.47% in average interest
earning assets to $695.0 million in 1996 from $652.8 million in 1995,
partially offset by a decrease in the interest rate spread to 3.55% in 1996
from 3.71% in 1995.
Interest income on loans was relatively stable at $38.0 million in 1996
and 1995, and included a decrease in the average yield earned to 8.97% in 1996
from 9.07% in 1995, offset by an increase in average balances of $3.9 million
to $423.4 million in 1996 from $419.5 million in 1995. The decrease in yields
in 1996 compared to 1995 reflects the lower interest rate environment for
loans during 1996 compared to 1995. Relatively stable interest rates and
competition for loans among financial institutions in the Company's market
areas contributed to the lower interest rate environment during 1996. The
increase in average balances in the loan portfolio in 1996 compared to 1995,
although relatively insignificant at less than 1% for the year, reflects
relatively weak loan demand in the first half of the year, where average
balances in fact decreased, and stronger loan demand in the last half of the
year. Residential real estate loan demand was strong throughout most of 1996;
however, commercial real estate loan demand was strong only during the latter
part of the year and the average balances of commercial, financial and
agricultural loans decreased. Additionally, beginning in July of 1996 the
Company began retaining for its portfolio, fifteen year fixed rate residential
real estate loans which prior to that time were being sold in the secondary
mortgage market.
Interest and dividend income on securities, including stock in FHLBB
increased $2.8 million or 21.90% to $15.6 million in 1996 from $12.8 million
in 1995. The increase in 1996 compared to 1995, was the result of an increase
in the average yield earned to 6.13% in 1996 from 5.92% in 1995, coupled with
an increase in average balances of $38.4 million or 17.78% to $254.6 million
in 1996 from $216.2 million in 1995. The Company invested in securities with
longer weighted average maturities during 1996 and invested proceeds of
maturing US Treasury obligations in US Government agency obligations. These
investments produced higher yields. Such higher yields were partially offset
by an acceleration of the amortization of premiums paid on mortgage-backed
securities, as a result of increased prepayment activity on these securities
in 1996.
Interest expense on deposits increased $1.9 million or 9.40% to $22.0
million in 1996 from $20.1 million in 1995. The increase in 1996 compared to
1995, is the result of an increase of $31.2 million or 6.18% in the average
balances of interest bearing deposits to $536.3 million in 1996 from $505.1
million in 1995, coupled with an increase in the cost of those deposits to
4.10% in 1996 from 3.98% in 1995. The opening of a new branch office in April
1996, the continued success of new deposit account products introduced in 1995
and the continuation of higher rates of interest offered on certain deposit
products in 1996 resulted in the higher average balances in deposits and the
higher cost of those deposits in 1996 compared to 1995.
Interest expense on securities sold under agreements to repurchase and
other borrowings increased $334 thousand or 6.80% to $5.2 million in 1996 from
$4.9 million in 1995. The increase in 1996 compared to 1995, was primarily the
result of an increase in average balances of $14.6 million or 17.07% to $100.3
million in 1996 from $85.7 million in 1995, offset by a decrease in the cost
of those borrowings to 5.23% in 1996 from 5.73% in 1995. The increase in
average balances related to an increase in average balances on securities sold
under agreements to repurchase of $10.0 million and an increase in average
balances of other borrowings of $4.6 million. Such increases were used to fund
investing activities in loans, securities held to maturity and securities
available for sale. The increase in the average balance of securities sold
under agreements to repurchase was the result of local municipalities and
commercial accounts making greater use of these instruments when investing
their excess funds. The decrease in the cost of securities sold under
agreements to repurchase and other borrowings related to the low interest rate
environment that was prevalent for these instruments during 1996. The average
cost of securities sold under agreements to repurchase was 4.76% and 5.25%
during 1996 and 1995, respectively. The average cost of other borrowings was
5.72% and 6.18% during 1996 and 1995, respectively.
Provision for Possible Loan Losses
The provision for possible loan losses was $1.4 million in 1996,
representing a 58.89% decrease from the provision of $3.3 million in 1995. The
decrease in the provision resulted primarily from a charge of $1.7 million in
1995, in order for the Company to pursue its accelerated asset disposition
plan and for which no additional charge was required in 1996, as well as
management's overall evaluation of the loan portfolio and the adequacy of the
level of the allowance for possible loan losses in relation to total loans and
nonperforming loans. Loans charged off in 1996 were $3.0 million compared to
$3.6 million in 1995. Recoveries of loans previously charged off were $750
thousand in 1996 compared to $307 thousand in 1995. Net loans charged off were
$2.3 million in 1996 compared to $3.3 million in 1995.
<PAGE> 22
Noninterest Income
Noninterest income was $5.7 million in 1996, an increase of $690
thousand or 13.69% from $5.0 million in 1995.
The increase in 1996 over 1995, was primarily attributable to an
increase in net gains on sales of securities available for sale of $312
thousand, an increase in customer account fees and service charges of $314
thousand and an increase in net gains on sales of loans of $469 thousand,
partially offset by a decrease in other noninterest income of $379 thousand. A
portion of the increase in net gains on sales of loans was as a result of the
Company's adoption of SFAS No. 122, Accounting for Mortgage Servicing Rights,
which increased net gains on sales of loans by $257 thousand in 1996. The
decrease in other noninterest income in 1996 related to a gain on sale of
mortgage servicing rights in 1995 of $432 thousand.
Noninterest Expense
Noninterest expense was $22.6 million in 1996, a decrease of 7.08% over
$24.4 million in 1995.
Salaries and benefits expense increased $659 thousand or 6.35% to $11.0
million in 1996 from $10.4 million in 1995. The increase in salary and
compensation expense was the result of normal salary increases, increased
staffing levels and increases in related payroll taxes, retirement and other
benefits, partially offset by decreases in benefit expenses relating primarily
to health insurance costs.
Occupancy and equipment expense increased $480 thousand or 13.93% to
$3.9 million in 1996 from $3.4 million in 1995. The increase was the result of
depreciation expense for new equipment associated with the Company upgrading
its data processing systems during the third quarter of 1995 and making
further enhancements to those systems during 1996, and the addition of a
second branch office in Concord, New Hampshire opened in the third quarter of
1995, which was opened for the full year in 1996.
Expenses associated with other real estate owned decreased $2.6 million
to a recovery of $52 thousand in 1996 from expenses of $2.5 million in 1995.
The decrease was primarily the result of a charge taken in 1995 of $1.6
million related to the Company's accelerated asset disposition plan, as well
as the continued reduction of other real estate owned in 1996 which enabled
the Company to reduce the related other real estate owned expenses.
Merger-related charges decreased $736 thousand to $0 in 1996 from $736
thousand in 1995. Merger-related charges in 1995 related to the acquisition by
Primary Bank of Horizon Bank and Trust, which was completed in April of 1995
and which was accounted for by the pooling-of-interests method of accounting.
Other noninterest expense increased $446 thousand to $7.7 million in
1996 from $7.3 million in 1995. Components with significant changes in other
noninterest expense were data processing expenses, FDIC deposit insurance
premiums and a special assessment by the FDIC to recapitalize the SAIF on the
Company's SAIF-assessable OAKAR deposits. Data processing expenses increased
as Primary Bank eliminated its in house data processing center in the fourth
quarter of 1995 and began utilizing an outside service bureau. FDIC deposit
insurance premiums decreased in 1996 from 1995. The decrease is the result of
the FDIC further decreasing BIF deposit insurance premiums in 1996 compared to
1995 as a result of the BIF being fully recapitalized in 1995. The special
SAIF assessment on the Company's SAIF-assessable OAKAR deposits was a result
of the FDIC making this special assessment for the purpose of recapitalizing
the SAIF as a result of legislation signed by the President of the United
States on September 30, 1996.
Income Taxes
Income tax expense increased $67 thousand or 4.09% to $1.7 million in
1996 from $1.6 million in 1995 and represented effective tax rates of 19.1%
and 39.8% in 1996 and 1995, respectively, of pretax income. The reason the tax
rate in 1996 is lower than the statutory rate of 34% relates primarily to the
reversal of a portion of the valuation allowance established for net operating
losses as a result of current and projected earnings. The reason the tax rate
in 1995 is higher than the statutory rate of 34% relates primarily to the
additional amounts recorded to the valuation allowance for net operating
losses.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
The Company's capital base totaled $66.9 million or 8.22% of total
assets at December 31, 1997 compared to $59.4 million, or 7.45% of total
assets at December 31,1996. Stockholders' equity increased $7.5 million,
primarily related to net earnings of $2.3 million, an increase in unrealized
gains on securities available for sale net of related tax effects of $4.1
million and transactions related to stock options of $2.9 million partially
offset by dividends declared of $1.6 million.
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
<PAGE> 23
time. Shares repurchased under the program may be held in treasury, retired or
used for general corporate purposes. As of March 31, 1997, the Company had
repurchased 72,549 shares under the Program. No shares were repurchased under
the Program after March of 1997, and, as a result of the merger with Primary
Bank, the Stock Repurchase Program was terminated.
The Company and subsidiary bank are subject to various regulatory
capital requirements administered by federal banking agencies. Failure to meet
minimum requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and subsidiary bank must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsidiary bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk weighted assets (as defined), and of Tier
I capital (as defined) to average assets (as defined). As of December 31,
1997, the Company and subsidiary bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Company's wholly-owned subsidiary bank as "well-capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as well-capitalized, the subsidiary bank must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There have been no conditions or events since that notification that
management believes would cause a change in the subsidiary bank's
categorization.
The Company's and the subsidiary bank's actual capital amounts and
ratios as of December 31, 1997 and 1996 are presented in the following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------- ------- -------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $65,688 12.87% $40,836 >=8.00% N/A
Subsidiary Bank $63,737 12.49% $40,830 >=8.00% $51,038 >=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $59,292 11.62% $20,418 >=4.00% N/A
Subsidiary Bank $57,342 11.24% $20,415 >=4.00% $30,623 >=6.00%
Tier I Capital (to Average Assets):
Consolidated $59,292 7.47% $31,730 >=4.00% N/A
Subsidiary Bank $57,342 7.23% $31,723 >=4.00% $39,654 >=5.00%
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $61,359 13.60% $36,092 >=8.00% N/A
Subsidiary Bank $60,632 13.45% $36,074 >=8.00% $45,092 >=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $55,711 12.35% $18,047 >=4.00% N/A
Subsidiary Bank $54,987 12.19% $18,037 >=4.00% $27,055 >=6.00%
Tier I Capital (to Average Assets):
Consolidated $55,711 7.13% $31,251 >=4.00% N/A
Subsidiary Bank $54,987 7.04% $31,242 >=4.00% $39,053 >=5.00%
</TABLE>
<PAGE> 24
Liquidity
The principal source of funds for the payment of dividends and expenses
by the Company, is dividends paid to it by the subsidiary bank. Bank
regulatory authorities generally restrict the amounts available for payment of
dividends by the subsidiary bank to the Company if the effect thereof would
cause the capital of the subsidiary bank to be reduced below applicable
capital requirements. These restrictions indirectly affect the Company's
ability to pay dividends. Dividends paid to the Company by the subsidiary bank
in 1997, 1996 and 1995 were $3.0 million, $2.0 million and $2.0 million,
respectively. The primary source of liquidity in the Company is its interest
bearing deposit with its subsidiary bank of $2.5 million at December 31, 1997.
Management believes that these funds are adequate to provide for the Company's
needs.
The subsidiary bank monitors its level of short-term assets and
liabilities, maintaining an appropriate balance between liquidity, risk and
return. The major sources of liquidity are deposits, securities available for
sale, maturities of securities held to maturity, interest bearing deposits in
FHLBB and amortization, prepayments and maturities of outstanding loans and
other borrowings from the FHLBB. While maturities and scheduled amortization
of loans are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by interest rate trends, economic
conditions and competition.
The Company's and subsidiary bank's liquidity, represented by cash and
due from banks, is a product of its operating activities, investing activities
and financing activities. These activities are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Cash and due from banks at beginning of year $ 30,559 $ 28,811 $ 19,562
Operating activities:
Net earnings 2,307 7,201 2,482
Adjustments to reconcile net earnings to net
cash provided by operating activities 4,496 175 4,199
-------------------------------
Net cash provided by operating activities 6,803 7,376 6,681
Net cash used in investing activities (15,609) (67,418) (50,107)
Net cash provided by financing activities 6,924 61,790 52,675
-------------------------------
Cash and due from banks at end of year $ 28,677 $ 30,559 $ 28,811
===============================
</TABLE>
Operating activities provided positive cash flows in 1997, 1996 and 1995
and were primarily comprised of net earnings and net noncash items included in
earnings which positively affected cash flows.
Investing activities used cash in 1997, 1996 and 1995. The primary
investing activities of the Company and the subsidiary bank, are originating
loans and purchasing securities available for sale and securities held to
maturity. In 1997, 1996 and 1995, loan originations net of repayments were
$68.6 million, $41.3 million and $23.5 million, respectively. Purchases of
securities available for sale and securities held to maturity were $154.3
million, $205.6 million and $70.2 million, respectively, in 1997, 1996 and
1995. A substantial portion of the net loan originations and purchases of
securities available for sale and securities held to maturity in 1997, 1996
and 1995, were funded by increases in deposits and securities sold under
agreements to repurchase, maturities and calls of securities held to maturity
and maturities, calls and sales of securities available for sale in each of
those years and by other borrowings in 1996.
Financing activities provided cash in 1997, 1996 and 1995. The primary
financing activities of the Company and the subsidiary bank are deposits,
short-term borrowings in the form of securities sold under agreements to
repurchase and other borrowings. In 1997, 1996 and 1995, deposits increased by
$39.3 million, $18.5 million and $71.0 million, respectively. Securities sold
under agreements to repurchase increased $1.1 million, $15.0 million and $10.8
million, respectively in 1997, 1996 and 1995. In 1997 and 1995, other
borrowings decreased as repayments exceeded proceeds of borrowings by $33.3
million and $27.6 million, respectively, while proceeds of borrowings exceeded
repayments in 1996 which caused an increase in borrowings of $30.7 million.
Net cash provided by financing activities in 1997, 1996 and 1995 was used to
fund investing activities.
<PAGE> 25
Liquidity management is both a daily and long-term function of
management. Excess liquidity is generally invested in short-term investments
such as interest bearing deposits in the FHLBB and 2 to 5 year fixed income US
Treasury and US Government agency securities and, to a lesser extent,
corporate securities. In addition to assets in cash on hand and due from banks
of $28.7 million at December 31, 1997, the Company through its subsidiary bank
has interest bearing deposits in the FHLBB of $27.5 million and securities
available for sale of $178.7 million. In addition to these liquidity sources
the Company has significant cash flow from the repayments of loans through its
subsidiary bank. If the subsidiary bank requires funds beyond its ability to
generate them internally, borrowing arrangements with the FHLBB can provide
additional funds. At December 31, 1997, the subsidiary bank had $25.9 million
of outstanding borrowings with the FHLBB, with an additional borrowing
capacity of approximately $266.7 million.
The Company anticipates that the subsidiary bank will have sufficient
funds available to meet its current loan commitments. At December 31, 1997,
the subsidiary bank had outstanding loan commitments of $64.0 million. For
additional information as to loan commitments, see note M of Notes to
Consolidated Financial Statements. Time deposits which are scheduled to mature
in one year or less at December 31, 1997, totalled $237.7 million. Management
believes that a significant portion of such deposits will remain with the
subsidiary bank.
For a discussion of the limitations that federal law places on
extensions of credit from banks to their parent holding company, see note S of
Notes to Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated financial
data herein have been presented in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation.
Inflation can affect the Company in a number of ways, including increased
operating costs and interest rate volatility. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant
impact on a financial institution's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Management attempts to minimize the effects of inflation by maintaining an
approximate match between interest rate sensitive assets and interest rate
sensitive liabilities and, where practical, by adjusting service fees to
reflect changing costs.
LEGAL PROCEEDINGS
The Company is a defendant in ordinary and routine pending legal actions
incident to its business, none of which is believed by management to be
material to the financial condition of the Company.
RECENT ACCOUNTING DEVELOPMENTS
During 1997, the Company adopted SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". The
Company's adoption of this accounting pronouncement did not have a material
impact on its financial condition or results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock or potential common
stock. This statement simplifies the standard for computing EPS previously
found in Accounting Principles Board Opinion No. 15 ("APB No. 15"). It
replaces the presentation of primary EPS with a presentation of basic EPS and
the presentation of fully diluted EPS with a presentation of diluted EPS.
Basic EPS is computed by dividing net earnings by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997 and requires the restatement of all prior-period EPS data
presented. The Company adopted SFAS No. 128, as required on December 31, 1997
and restated EPS for all prior periods presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires that all items that are components of
"comprehensive income" be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income
is defined as the change in equity [net assets] of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Companies will be required to (a) classify items of other comprehensive income
by their
<PAGE> 26
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997
and requires reclassification of prior periods presented. As the requirements
of SFAS No. 130 are disclosure-related, its implementation will have no
impact on the Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information". SFAS No.
131 requires that enterprises report certain financial and descriptive
information about operating segments in complete sets of financial statements
of the Company and in condensed financial statements of interim periods issued
to shareholders. It also requires that a Company report certain information
about their products and services, geographic areas in which they operate and
their major customers. As the requirements of SFAS No. 131 are disclosure-
related, its implementation will have no impact on the Company's financial
condition or results of operations. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997 and requires interim periods to be presented
in the second year of application.
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The
"year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two digit year
value to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be completed
by December 31, 1998, allowing adequate time for testing. To date,
confirmations have been received from the Company's primary processing vendors
that plans are developed to address processing of transactions in the year
2000 and plans are in the process of being developed for actual testing.
Management believes that costs related to the year 2000 compliance will not
have any significant adverse affect on the Company's earnings.
<PAGE> 27
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements of Granite State Bankshares, Inc.
and subsidiary have been prepared by management, which is responsible for
their content and accuracy. The statements present the results of operations,
cash flows, and financial position of the Company in conformity with generally
accepted accounting principles and, accordingly, include amounts based on
management's judgments and estimates. Information in other sections of this
annual report is consistent with that included in the financial statements.
Granite State Bankshares, Inc. and its subsidiary have established and
maintain an internal control structure designed to provide reasonable
assurance that assets are safeguarded and that transactions are properly
authorized by management and recorded in conformity with generally accepted
accounting principles. This structure includes accounting controls, written
policies and procedures, and a code of corporate conduct which stresses the
highest ethical standards and is routinely communicated to all employees.
The Audit Committee of the Board of Directors, which is composed solely
of outside directors, meets periodically with management, the internal
auditor, and the independent auditors to review audit findings, adherence to
corporate policies and other financial matters.
The firm of Grant Thornton LLP, Certified Public Accountants, has been
engaged to audit and report on the Company's consolidated financial
statements. Its audit was conducted in accordance with generally accepted
auditing standards and included a review of internal accounting controls to
the extent deemed necessary for the purpose of its report, which follows.
/s/ CHARLES W. SMITH /s/ WILLIAM G. PIKE
Charles W. Smith William G. Pike
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
(principal accounting officer)
<PAGE> 28
[LETTERHEAD OF GRANT THORNTON LLP]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Granite State Bankshares, Inc.
We have audited the accompanying consolidated statements of financial
condition of Granite State Bankshares, Inc. and subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the management of Granite State Bankshares, Inc. Our responsibility is to
express an opinion on these financial statements based on our audits.
The condolidated financial statements as of December 31, 1996, and for
the years ended December 31, 1996 and 1995 have been restated to reflect the
pooling of interests with Primary Bank as described in note B of notes to
consolidated financial statements. We did not audit the 1996 and 1995
financial statements of Primary Bank, which statements reflect total assets of
$427,407,000 as of December 31, 1996 and net interest and dividend income of
$13,479,000 and $13,171,000 for the years ended December 31, 1996 and 1995,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Primary Bank as of December 31, 1996 and for the years ended
December 31, 1996 and 1995 is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provides a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements referred to above, present fairly, in
all material respects, the financial position of Granite State Bankshares,
Inc. and subsidiary as of December 31, 1997 and 1996 and the results of their
operations and their consolidated cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
January 12, 1998
<PAGE> 29
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
--------- ---------
(In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 28,677 $ 30,559
Interest bearing deposits in Federal Home Loan Bank of
Boston, at cost, which approximates market value 27,452 17,993
Securities available for sale (amortized cost $169,373,000
in 1997 and $180,054,000 in 1996) 178,680 182,462
Securities held to maturity (market value $34,170,000 in
1997 and $83,792,000 in 1996) 33,910 84,403
Stock in Federal Home Loan Bank of Boston 7,201 6,365
Loans held for sale 1,068 1,025
Loans 509,165 442,297
Less: Unearned income (1,432) (1,860)
Allowance for possible loan losses (7,651) (6,253)
---------------------
Net loans 500,082 434,184
Premises and equipment 18,863 19,598
Other real estate owned 1,905 3,492
Other assets 15,832 17,759
---------------------
Total assets $ 813,670 $ 797,840
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Interest bearing deposits $ 577,713 $ 546,396
Noninterest bearing deposits 71,270 63,271
---------------------
Total deposits 648,983 609,667
Securities sold under agreements to repurchase 66,025 64,961
Other borrowings 25,877 59,190
Other liabilities 5,871 4,593
---------------------
Total liabilities 746,756 738,411
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized 7,500,000
shares; none issued
Common stock, $1.00 par value; authorized 12,500,000
shares; 6,493,640 and 6,264,005 shares issued at
December 31, 1997 and 1996, respectively 6,494 6,264
Additional paid-in capital 34,730 32,015
---------------------
41,224 38,279
Retained earnings 26,389 25,704
Unrealized gain on securities available for sale, net of
related tax effects 5,713 1,589
---------------------
73,326 65,572
Less: Treasury stock, at cost, 920,305 and 900,120 shares
at December 31, 1997 and 1996, respectively (6,305) (6,000)
Unearned compensation-ESOP (107) (143)
---------------------
Total stockholders' equity 66,914 59,429
---------------------
Total liabilities and stockholders' equity $ 813,670 $ 797,840
=====================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 30
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
($ In Thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income
Loans $ 42,307 $ 37,969 $ 38,036
Debt securities available for sale 9,771 10,270 6,352
Marketable equity securities available for sale 586 294 217
Securities held to maturity 5,110 4,622 5,716
Interest bearing deposits in Federal Home Loan Bank of Boston 781 857 961
Dividends on Federal Home Loan Bank of Boston stock 456 418 516
-----------------------------------
Total interest and dividend income 59,011 54,430 51,798
Interest expense
Deposits 23,322 21,999 20,108
Securities sold under agreements to repurchase 2,847 2,438 2,165
Other borrowings 2,731 2,806 2,745
-----------------------------------
Total interest expense 28,900 27,243 25,018
-----------------------------------
Net interest and dividend income 30,111 27,187 26,780
Provision for possible loan losses 2,425 1,372 3,337
-----------------------------------
Net interest and dividend income after provision for
possible loan losses 27,686 25,815 23,443
Noninterest income
Customer account fees and service charges 2,969 3,033 2,719
Mortgage service fees 634 677 703
Net gains on sales of securities available for sale 2,187 650 338
Net gains on sales of loans 415 798 329
Other 894 573 952
-----------------------------------
7,099 5,731 5,041
Noninterest expense
Salaries and benefits 13,822 11,036 10,377
Occupancy and equipment 4,197 3,927 3,447
Other real estate owned 63 (52) 2,521
Merger-related charges 5,917 736
Other 7,775 7,729 7,283
-----------------------------------
31,774 22,640 24,364
-----------------------------------
Earnings before income taxes 3,011 8,906 4,120
Income taxes 704 1,705 1,638
-----------------------------------
NET EARNINGS $ 2,307 $ 7,201 $ 2,482
===================================
Net earnings per share-basic $ .42 $ 1.35 $ .46
===================================
Net earnings per share-diluted $ .40 $ 1.28 $ .44
===================================
Shares used in computing net earnings per share-basic 5,444,350 5,323,480 5,411,409
Shares used in computing net earnings per share-diluted 5,751,262 5,614,554 5,678,811
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Additional Securities Unearned
Common Paid-in Retained Treasury Available Compensation
Stock Capital Earnings Stock for Sale, net ESOP Total
------ ---------- -------- -------- -------------- ------------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 $5,956 $ 31,424 $18,126 $(3,429) $(3,163) $ (278) $ 48,636
Net earnings 2,482 2,482
Payment of Employee Stock Ownership Plan
Indebtedness 99 99
Employee Stock Ownership Plan distribution 23 23
Stock dividend 98 (98)
Cash dividends declared on common stock,
$.18 per share (989) (989)
Change in unrealized gain (loss) on securities
available for sale, net of income taxes 5,021 5,021
Issuance of common stock upon exercise of stock
options 1 177 178
Purchase of common stock for treasury (695) (695)
------------------------------------------------------------------------------
Balance as of December 31, 1995 6,055 31,526 19,619 (4,124) 1,858 (179) 54,755
Net earnings 7,201 7,201
Payment of Employee Stock Ownership Plan
Indebtedness 36 36
Employee Stock Ownership Plan distribution 25 25
Stock dividend 104 (104)
Cash dividends declared on common stock,
$.20 per share (1,116) (1,116)
Change in unrealized gain (loss) on securities
available for sale, net of income taxes (269) (269)
Issuance of common stock upon exercise of stock
options, including related tax effects 105 568 673
Purchase of common stock for treasury (1,876) (1,876)
------------------------------------------------------------------------------
Balance as of December 31, 1996 6,264 32,015 25,704 (6,000) 1,589 (143) 59,429
Net earnings 2,307 2,307
Payment of Employee Stock Ownership Plan
Indebtedness 36 36
Employee Stock Ownership Plan distribution 94 94
Cash dividends declared on common stock,
$.29 per share (1,622) (1,622)
Change in unrealized gain (loss) on securities
available for sale, net of income taxes 4,124 4,124
Issuance of common stock upon exercise of stock
options, including related tax effects and
vesting of performance-based stock options 230 2,621 2,851
Purchase of common stock for treasury (305) (305)
------------------------------------------------------------------------------
Balance as of December 31, 1997 $6,494 $ 34,730 $26,389 $(6,305) $ 5,713 $ (107) $ 66,914
==============================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) in cash and due from banks
Cash flows from operating activities
Net earnings $ 2,307 $ 7,201 $ 2,482
Adjustments to reconcile net earnings to net cash provided by
operating activities
Provision for possible loan losses 2,425 1,372 3,337
Provision for depreciation and amortization 2,329 2,312 2,257
Net (accretion) amortization of security discounts and premiums 24 (107) (533)
Provision for loss (recovery) on other real estate owned 25 (383) 1,897
Earned compensation-performance-based stock options 1,078
Deferred income tax benefits (1,243) (133) (342)
Realized gains on sales of securities available for sale, net (2,187) (650) (338)
Writedown of premises and equipment 1,305
Loans originated for sale (26,435) (27,205) (29,159)
Proceeds from sale of loans originated for sale 26,807 28,719 28,154
(Increase) decrease in other assets 3,509 (2,647) 405
Decrease in other liabilities (2,270) (130) (653)
Decrease in unearned compensation-ESOP 36 36 99
Realized gains on sales of loans (415) (798) (329)
Realization of unearned income (428) (62) (389)
Realized gains on sales of other real estate owned (64) (149) (207)
--------------------------------
Net cash provided by operating activities 6,803 7,376 6,681
--------------------------------
Cash flows from investing activities
Proceeds from sales of securities available for sale 116,531 71,485 14,556
Proceeds from maturities and calls of securities available for sale 52,500 50,948 15,998
Principal payments received on securities available for sale 13,294 7,469 840
Purchase of securities available for sale (147,266) (146,853) (34,293)
Purchase of securities held to maturity (7,000) (58,767) (35,889)
Proceeds from maturities and calls of securities held to maturity 33,150 17,814 29,150
Principal payments received on securities held to maturity 2,129 4,525 4,322
Purchase of Federal Home Loan Bank of Boston stock (836) (150) (407)
Redemption of Federal Home Loan Bank of Boston stock 1,343
Loan originations, net of repayments (68,627) (41,275) (23,511)
Purchase of premises and equipment (2,489) (2,394) (3,494)
Net (increase) decrease in interest-bearing deposits in Federal
Home Loan Bank of Boston (9,459) 6,246 (24,213)
Proceeds from sales of other real estate owned 2,376 4,752 3,892
Proceeds from sale of loans 17,638 2,689
Other 88 (199) 253
--------------------------------
Net cash used in investing activities (15,609) (67,418) (50,107)
--------------------------------
Cash flows from financing activities
Net increase in demand, NOW, money market and savings accounts 19,865 6,217 428
Net increase in time certificates 19,451 12,327 70,596
Net increase in securities sold under agreements to repurchase 1,064 15,003 10,845
Increase (decrease) in other borrowings (33,313) 30,691 (27,580)
Repayment on liability relating to ESOP (36) (36) (99)
Dividends paid on common stock (1,285) (1,083) (998)
Proceeds from issuance of common stock 1,483 547 178
Purchase of treasury stock (305) (1,876) (695)
--------------------------------
Net cash provided by financing activities 6,924 61,790 52,675
--------------------------------
Net increase (decrease) in cash and due from banks (1,882) 1,748 9,249
Cash and due from banks at beginning of year 30,559 28,811 19,562
--------------------------------
Cash and due from banks at end of year $ 28,677 $ 30,559 $ 28,811
================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A-Summary of Significant Accounting Policies
The accounting and reporting policies of Granite State Bankshares, Inc.
(the "Company") and its wholly-owned subsidiary, Granite Bank (the "subsidiary
bank") conform to generally accepted accounting principles and to general
practices within the banking industry.
The subsidiary bank has been and continues to be a community oriented
commercial bank offering a variety of financial services. The principal
business of the subsidiary bank consists of attracting deposits from the
general public and originating loans secured by residential and commercial
real estate and other loans. The subsidiary bank also originates fixed rate
residential real estate loans for sale in the secondary mortgage market. The
subsidiary bank has twenty full service offices and an additional twenty
remote automatic teller locations. The subsidiary bank is a full service
community bank with a diversified lending operation that services Cheshire,
Hillsborough, Merrimack, Strafford and Rockingham counties, New Hampshire.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets, and income and expense for
the periods. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change in the
near-term relate to the determination of the allowance for possible loan
losses and valuation of other real estate owned. In connection with the
determination of the allowance for possible loan losses and the carrying value
of other real estate owned, management obtains independent appraisals for
significant properties.
A substantial portion of the Company's loans are secured by real estate
in New Hampshire. In addition, a majority of other real estate owned is
located in New Hampshire. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio and the recovery of all
the other real estate owned is susceptible to changing conditions in New
Hampshire.
The following is a description of the significant accounting policies.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and the subsidiary bank. All significant intercompany transactions
and balances have been eliminated in consolidation.
2. Reclassifications and Restatements
The consolidated financial statements as of December 31, 1996 and for
the years ended December 31, 1996 and 1995 have been restated to reflect the
pooling-of-interests with Primary Bank. See note B-Mergers and Acquisitions.
In addition, certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
Prior period common stock and per share data have been restated to
reflect the pooling-of-interests with Primary Bank and the Company's three-
for-two stock split effected in the form of a 50% stock dividend declared on
April 14, 1997 to stockholders of record April 25, 1997 and paid on May 9,
1997. Per share data have also been restated for the stock dividends paid by
Primary Bank.
3. Cash and Due From Banks
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks. The Federal Reserve Bank requires
the subsidiary bank to maintain average reserve balances. The average amount
of these reserve balances for the year ended December 31, 1997, was
approximately $13,300,000.
4. 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 estimated income taxes. During 1997, 1996 and
1995, the Company had no securities classified as trading securities.
Premiums and discounts on securities are amortized or accreted into
earnings on the straight-line method over the life of the investments. Income
recognized by use of this method does not differ materially from that which
would be recognized by use of the level-yield method. If a decline in fair
value below the amortized cost basis of a security is judged to be other than
temporary, the cost basis of the security is written down to fair value as a
new cost basis and the amount of the write-down is included as a charge
against net gains or losses on securities. Gains and losses on the sale of
<PAGE> 34
securities available for sale are recognized at the time of sale on a specific
identification basis.
5. Loans
Real estate mortgage loans and other loans are stated at the amount of
unpaid principal, less unearned income and the allowance for possible loan
losses.
Interest on loans is included in income as earned based on rates applied
to principal amounts outstanding. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full, timely collection of
interest or principal, or when a loan becomes contractually past due by ninety
days, unless the loan is well secured and in the process of collection. When a
loan is placed on nonaccrual status, all interest previously accrued is
reversed against current period interest income. Interest subsequently
received on nonaccrual loans is either applied against principal or recorded
as income according to management's judgment as to the collectibility of
principal.
The Company measures loan impairment on commercial and commercial real
estate loans in excess of $75,000 based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or on a
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. When the Company determines that foreclosure is
probable, it measures impairment based on the fair value of the collateral.
Loans that experience insignificant payment delays and insignificant
shortfalls in payment amounts generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record, and
the amount of the shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans of $75,000 or less are
collectively evaluated for impairment. Additionally, large groups of smaller
balance homogeneous loans, such as residential real estate and consumer loans
are collectively evaluated for impairment.
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and amortized as an adjustment of the related loan
yield over the contractual life of the loans.
6. Allowance for Possible Loan Losses
The adequacy of the allowance for possible loan losses is evaluated on a
regular basis by management. Factors considered in evaluating the adequacy of
the allowance include previous loss experience, current economic conditions
and their effect on borrowers and the performance of individual loans in
relation to contract terms. The provision for possible loan losses charged to
operations is based upon management's judgment of the amount necessary to
maintain the allowance at a level adequate to absorb possible losses. Loan
losses are charged against the allowance when management believes the
collectibility of the principal is unlikely, and recoveries are credited to
the allowance when received.
Management believes that the allowance for possible loan losses is
adequate. While management evaluates the allowance for possible loan losses
based upon available information, future additions to the allowance may be
necessary. Additionally, regulatory agencies review the Company's allowance
for possible loan losses as part of their examination process. Such agencies
may require the Company to recognize additions to the allowance based on
judgments which may be different from those of management.
7. Mortgage Banking Activities
Mortgage loans held for sale into the secondary market and commitments
to fund such loans are carried at the lower of cost or estimated market value
as determined by outstanding investor and origination commitments or, in the
absence of such commitments, current investor yield requirements. Valuation
adjustments are charged against gain/loss on sales of mortgage loans. Gains or
losses on sales of mortgage loans are recognized at the time of the sale.
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights, an Amendment of FASB Statement No. 65." The Statement, which
was prospectively adopted by the Company on January 1, 1996, requires the
Company to recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. When the Company acquires
mortgage servicing rights either through the purchase or origination of
mortgage loans (originated mortgage loan servicing rights) and sells those
loans with servicing rights retained, it allocates the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. As a result of
adoption, the Company recorded additional gains on sales of mortgage loans of
approximately $257,000 and amortization expense on originated mortgage
servicing rights of $35,000 for the year ended December 31, 1996. The after
tax impact of these items increased net earnings by $136,000, basic earnings
per share by $.03 and diluted earnings per share by $.02.
Purchased and originated loan servicing rights are amortized on a basis
which results in approximately level
<PAGE> 35
rates of return in proportion to, and over the period of, estimated net
servicing income.
On a quarterly basis, the Company assesses the carrying values of
originated and purchased mortgage servicing rights for impairment based on the
fair value of such rights. A valuation model that calculates the present value
of future cash flows is used to estimate such fair value. This valuation model
incorporates assumptions that market participants would use in estimating
future net servicing income including estimates of the cost of servicing
loans, discount rate, float value, ancillary income, prepayment speeds and
default rates. Any impairment is recognized as a charge to earnings through a
valuation allowance.
During 1997 the Company prospectively adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as required by the FASB. SFAS No. 125 superceded SFAS No. 122,
"Accounting for Mortgage Servicing Rights," an Amendment of FASB Statement No.
65. The adoption of SFAS No. 125 had no significant impact on the Company's
consolidated financial position or consolidated results of operations.
8. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the assets or the
remaining lease terms, if shorter. Useful lives are 15-50 years for bank
buildings, 3-20 years for leasehold improvements and 2-10 years for furniture
and equipment.
Gains or losses on routine dispositions are credited or charged to
earnings. Maintenance and repairs are charged to expense as incurred, and
improvements are capitalized.
9. Other Real Estate Owned
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Other
real estate owned is recorded at the lower of the carrying value of the loan
or the fair value of the property received less a valuation allowance for
estimated costs to sell. Loan losses arising from the acquisition of such
properties are charged against the allowance for possible loan losses.
Provisions to reduce the carrying value to net realizable value are charged to
current period earnings as realized and are reflected as an additional
valuation allowance. Operating expenses and gains and losses upon disposition
are reflected in earnings as realized.
10. Other Assets
Goodwill arising from acquisitions is included in other assets, net of
accumulated amortization, and is amortized on the straight-line basis over 15
years.
Mortgage servicing rights are included in other assets, net of
accumulated amortization, and are amortized on a basis which results in
approximately level rates of return in proportion to, and over the period of,
estimated net servicing income.
11. Impairment of Long-Lived Assets
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"). SFAS No. 121 is effective for years beginning after December
15, 1995 and establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. This statement requires that long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company's adoption of SFAS No. 121 on January 1, 1996, had
no significant effect on its consolidated financial statements.
12. Fair Value of Financial Instruments
In accordance with SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, the Company is required to disclose estimated fair
values of financial instruments. Fair value estimates, methods, and
assumptions are set forth below in note V of Notes to Consolidated Financial
Statements.
13. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and the respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under the
asset and liability method, the effect on deferred tax
<PAGE> 36
assets and liabilities of a change in tax rates is recognized in earnings in
the period that includes the enactment date.
Tax credits are accounted for under the flow-through method as a
reduction of income tax expense in the period they are realized.
14. Retirement and Benefit Plans
The Company and its subsidiary bank have a non-contributory defined
benefit Pension Plan covering substantially all of the Company's employees.
Contributions are intended to provide for benefits attributed to services
rendered to date and for those expected to be earned in the future.
The Company sponsors a Supplemental Executive Retirement Plan ("SERP").
The SERP is a nonqualified plan designed to provide supplemental retirement
benefits to certain key employees, whose benefits under the Company's other
retirement plans are limited by Federal tax laws.
The Company has an Employee Stock Ownership Plan ("ESOP"), covering
eligible employees with one year of service as defined by the ESOP. The
Company records compensation expense in an amount equal to the fair value of
shares committed to be released from the ESOP to employees.
15. Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a
fair value based method of accounting for stock-based compensation
arrangements with employees, rather than the intrinsic value based method that
is contained in Accounting Principles Board Opinion No. 25 ("Opinion 25").
However, SFAS No. 123 did not require an entity to adopt the new fair value
based method for purposes of preparing its basic financial statements.
Entities are allowed (1) to continue to use the intrinsic value based method
under Opinion 25 or (2) to adopt the SFAS No. 123 fair value based method.
SFAS No. 123 applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price, except for
employee stock ownership plans. For entities not adopting the SFAS No. 123
fair value based method, SFAS No. 123 requires the entity to display in the
footnotes to the financial statements pro forma net earnings and earnings per
share information as if the fair value based method had been adopted. The
Company continues to account for stock-based compensation under the intrinsic
value based method under Opinion 25, as allowed by SFAS No. 123, and includes
presentation of the appropriate required pro forma disclosures in the notes to
the consolidated financial statements.
16. Earnings Per Share
The FASB issued SFAS No. 128 "Earnings Per Share," in February of
1997. SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. This statement simplifies the standard
for computing EPS found in Accounting Principles Board Opinion No. 15 ("APB
No. 15"). It replaces primary EPS with a presentation of basic EPS and the
presentation of fully diluted EPS with a presentation of diluted EPS.
As required by the FASB, the Company adopted SFAS No. 128 on December
31, 1997 and has restated EPS for all prior-period EPS data presented.
Basic EPS is computed by dividing net earnings by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company.
17. Derivative Financial Instruments
The Company utilizes interest rate cap agreements to manage exposure to
interest rate risk. The Company does not purchase derivative financial
instruments for trading purposes. The Company receives an interest payment if
the three-month London Interbank Offered Rate ("LIBOR") increases above a
predetermined rate. This payment would be based upon the rate difference
between current LIBOR and the predetermined rate accrued on the notional value
of the instrument. The amounts received on the interest rate cap agreements
are accounted for as an adjustment to the yield or cost of the hedged
financial instruments. The transaction fee paid on the interest rate cap is
amortized over the life of the contract.
18. Recent Accounting Developments
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires that all items that are components of
"comprehensive income" be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income
is defined as the change in equity [net assets] of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Companies will be required to
<PAGE> 37
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires reclassification
of prior periods presented. As the requirements of SFAS No. 130 are
disclosure-related, its implementation will have no impact on the Company's
financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 requires that
enterprises report certain financial and descriptive information about
operating segments in complete sets of financial statements of the Company and
in condensed financial statements of interim periods issued to shareholders.
It also requires that a Company report certain information about their
products and services, geographic areas in which they operate and their major
customers. As the requirements of SFAS No. 131 are disclosure-related, its
implementation will have no impact on the Company's financial condition or
results of operations. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997 and requires interim periods to be presented in the
second year of application.
NOTE B-Mergers and Acquisitions
Effective after the close of business October 31, 1997, the Company
acquired Primary Bank. Each of Primary Bank's 2,194,685 outstanding shares of
common stock were converted into 1.1483 shares of the Company's common stock
resulting in the issuance of 2,520,157 shares of the Company's common stock to
Primary Bank stockholders. Outstanding stock options were similarly exchanged
for Company stock options. Primary Bank was a state-chartered guaranty (stock)
savings bank headquartered in Peterborough, New Hampshire. Primary Bank was
merged into Granite Bank, the Company's wholly-owned subsidiary, as part of
the transaction.
The merger was accounted for by the pooling-of-interests method of
accounting, and, accordingly, the financial information for all prior periods
presented have been restated to present the combined financial condition and
results of operations as if the combination had been in effect for all periods
presented.
Expenses directly attributable to the merger amounted to $5,917,000 and
were charged to earnings at the date of combination. These charges were
comprised of personnel costs of $1,462,000, data processing costs of
$1,282,000, facilities and equipment costs of $1,305,000 and other costs of
$1,868,000. Personnel costs related primarily to the costs of employee
severance, data processing costs related primarily to the termination of data
processing contracts with outside service bureaus, facilities and equipment
costs related to the consolidation of certain back-office operations and
consist of writedowns of properties owned and writedowns and disposition of
equipment which was unusable. Other merger expenses include investment banking
fees, legal and accounting fees, due diligence costs, proxy
registration/filing fees and mailing costs. All costs were recorded in
earnings in 1997.
The following table presents a summary of activity in 1997 with respect
to the merger accrual:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Balance at beginning of year $ 0
Provision charged against earnings 5,917
Cash outlays 2,999
Non-cash writedowns 1,305
------
Balance at end of year $1,613
======
</TABLE>
Of the remaining balance at year end $1,282,000 is for data processing
costs related primarily to the termination of data processing contracts with
outside service bureaus. At this time the Company anticipates full use of the
merger accrual based upon the identified cost of business actions and existing
contractual arrangements.
<PAGE> 38
Separate financial information of Granite State Bankshares, Inc.
("Granite State") and Primary Bank for periods prior to the acquisition is as
follows:
<TABLE>
<CAPTION>
Period Ended October 31, Year Ended December 31,
------------------------ --------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Granite Primary Granite Primary Granite Primary
State Bank State Bank State Bank
-------- -------- -------- -------- -------- --------
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest and dividend income $ 12,112 $ 12,669 $ 13,708 $ 13,479 $ 13,609 $ 13,171
Provision for possible loan losses 425 1,500 650 722 735 2,602
Noninterest income 4,180 2,440 3,181 2,550 2,515 2,526
Noninterest expense 9,035 12,328 10,514 12,126 10,081 14,283
Income taxes (benefits) 2,467 (457) 1,945 (240) 1,873 (235)
---------------------------------------------------------------------
Net earnings (loss) $ 4,365 $ 1,738 $ 3,780 $ 3,421 $ 3,435 $ (953)
=====================================================================
</TABLE>
NOTE C-Earnings Per Share
Information regarding the number of shares used in computing earnings
per share is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding-Basic 5,444,350 5,323,480 5,411,409
Dilutive effect of stock options computed using
the treasury stock method 306,912 291,074 267,402
-----------------------------------
Weighted average common shares outstanding-Diluted 5,751,262 5,614,554 5,678,811
===================================
</TABLE>
Options to purchase 109,363 and 98,153 shares of common stock were
outstanding at December 31, 1996 and 1995, respectively, but were not included
in the computation of weighted average common shares outstanding for purposes
of computing diluted earnings per share, because the effect would have been
antidilutive.
<PAGE> 39
NOTE D-Securities
The amortized cost and estimated market values of securities at December
31, were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Securities held to maturity
At December 31, 1997
US Government agency obligations $ 33,910 $ 285 $ 25 $ 34,170
--------------------------------------------------
Total securities held to maturity $ 33,910 $ 285 $ 25 $ 34,170
==================================================
Securities available for sale
At December 31, 1997
US Treasury obligations $ 82,470 $ 499 $ 82,969
US Government agency obligations 44,218 31 $ 50 44,199
Other corporate obligations 8,493 16 1 8,508
Mortgage-backed securities:
FNMA 11,723 49 95 11,677
FHLMC 6,562 26 41 6,547
GNMA 2,418 84 2,502
SBA 765 17 782
--------------------------------------------------
Total mortgage-backed securities 21,468 176 136 21,508
Mutual Funds 6,005 130 22 6,113
Marketable equity securities 6,719 8,664 15,383
--------------------------------------------------
Total securities available for sale $ 169,373 $ 9,516 $ 209 $ 178,680
==================================================
Securities held to maturity
At December 31, 1996
US Government agency obligations $ 67,711 $ 109 $ 504 $ 67,316
Mortgage-backed securities:
FNMA 7,030 32 141 6,921
FHLMC 1,000 99 901
GNMA 7,227 112 113 7,226
SBA 1,011 11 7 1,015
Other 424 11 413
--------------------------------------------------
Total mortgage-backed securities 16,692 155 371 16,476
--------------------------------------------------
Total securities held to maturity $ 84,403 $ 264 $ 875 $ 83,792
==================================================
Securities available for sale
At December 31, 1996
US Treasury obligations $ 25,847 $ 26 $ 21 $ 25,852
US Government agency obligations 65,748 21 424 65,345
Other corporate obligations 6,475 39 6,436
Mortgage-backed securities:
FNMA 33,284 59 233 33,110
FHLMC 32,402 39 260 32,181
GNMA 3,577 1 69 3,509
--------------------------------------------------
Total mortgage-backed securities 69,263 99 562 68,800
Mutual Funds 5,439 11 27 5,423
Marketable equity securities 7,282 3,329 5 10,606
--------------------------------------------------
Total securities available for sale $ 180,054 $ 3,486 $ 1,078 $ 182,462
==================================================
</TABLE>
<PAGE> 40
In the fourth quarter of 1997, the acquisition of Primary Bank (see
Note B-"Mergers and Acquisitions") necessitated a transfer of securities
held to maturity with an amortized cost of $22,226,000 and a net
unrealized loss of $156,000 to securities available for sale in order to
maintain the Company's existing interest rate risk profile.
As a member of the Federal Home Loan Bank of Boston ("FHLBB"), the
subsidiary bank is required to invest in $100 par value stock of the FHLBB
in the amount of 1% of its outstanding loans secured by residential
housing, or 1% of 30% of total assets, or 5% of its outstanding advances
from the FHLBB, whichever is higher. When such stock is redeemed, the
subsidiary bank would receive from the FHLBB an amount equal to the par
value of the stock. As of December 31, 1997 and 1996, the subsidiary bank
had investments in FHLBB stock of $7,201,000 and $6,365,000, respectively.
Such investments are reflected separately in the Consolidated Statements
of Financial Condition.
Gross realized gains and gross realized losses on sales of
securities available for sale for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Realized Realized Realized Realized Realized Realized
Gain Loss Gain Loss Gain Loss
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities
Debt securities $ 166 $ 1,018 $ 212 $ 324 $ 15 $ 91
Marketable equity securities 3,039 767 5 414
-------------------------------------------------------------
$ 3,205 $ 1,018 $ 979 $ 329 $ 429 $ 91
=============================================================
</TABLE>
At December 31, 1997, U. S. Treasury and U. S. Government Agency
Obligations with carrying values of $98,909,000 and estimated market
values of $99,054,000 were pledged as collateral for securities sold under
agreements to repurchase and for government deposit accounts.
The following table sets forth the maturity distribution of debt
securities held to maturity and available for sale at amortized cost and
estimated market value at December 31, 1997. Actual maturities may differ
from contractual maturities because certain issuers have the right to call
or prepay obligations without penalties.
<TABLE>
<CAPTION>
Over 1 Year Over 5 Years
Within Through Through Over
1 Year 5 Years 10 Years 10 Years Totals
------- ----------- ------------ -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amortized Cost
At December 31, 1997
Securities held to maturity
US Government agency obligations $ 0 $ 4,500 $ 29,410 $ 0 $ 33,910
============================================================
Securities available for sale
US Treasury obligations $ 82,470 $ 82,470
US Government agency obligations 39,243 $ 4,975 44,218
Other corporate obligations $ 6,508 1,985 8,493
Mortgage-backed securities 274 1,639 $ 19,555 21,468
------------------------------------------------------------
Total debt securities available for sale $ 6,508 $ 123,972 $ 6,614 $ 19,555 $ 156,649
============================================================
Estimated Market Value
At December 31, 1997
Securities held to maturity
US Government agency obligations $ 0 $ 4,503 $ 29,667 $ 0 $ 34,170
============================================================
Securities available for sale
US Treasury obligations $ 82,969 $ 82,969
US Government agency obligations 39,234 $ 4,965 44,199
Other corporate obligations $ 6,508 2,000 8,508
Mortgage-backed securities 280 1,628 $ 19,600 21,508
------------------------------------------------------------
Total debt securities available for sale $ 6,508 $ 124,483 $ 6,593 $ 19,600 $ 157,184
============================================================
</TABLE>
<PAGE> 41
NOTE E-Loans
Loans consist of the following at:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 68,513 $ 63,543
Real estate-residential 245,577 200,983
Real estate-commercial 151,474 139,400
Real estate-construction and land development 6,000 5,355
Installment 11,588 12,076
Other 26,013 20,940
----------------------
Total loans 509,165 442,297
Less:
Unearned income (1,432) (1,860)
Allowance for possible loan losses (7,651) (6,253)
----------------------
Net loans $ 500,082 $ 434,184
======================
</TABLE>
At December 31, 1997 and 1996, loans which were on nonaccrual status
were $7,145,000 and $4,086,000, respectively. Interest income which would
have been accrued on nonaccrual loans, had they performed in accordance
with the terms of their contracts, for the years ended December 31, 1997,
1996 and 1995, was $767,000, $679,000 and $929,000, respectively.
Interest income recognized on nonaccrual loans in 1997, 1996 and 1995
amounted to $413,000, $188,000 and $298,000, respectively.
The Company has identified loans as impaired in accordance with SFAS
No. 114, when it is probable that interest and principal will not be
collected according to the terms of the loan agreements. The balance of
impaired loans was $4,559,000 and $2,712,000, respectively, at December
31, 1997 and 1996. The allowance for possible loan losses associated with
impaired loans allocated from and part of the general allowance for
possible loan losses, upon the adoption of SFAS No. 114, on January 1,
1995 was $1,277,000. During 1997, 1996 and 1995, provisions to the
allowance for impaired loans amounted to $983,000, $499,000 and
$1,225,000, respectively, and impaired loans charged off amounted to
$386,000, $1,156,000 and $1,388,000, respectively. The allowance for
possible loan losses associated with impaired loans at December 31, 1997,
1996 and 1995 was $1,054,000, $457,000 and $1,114,000, respectively. At
December 31, 1997 and 1996, there were no impaired loans which did not
have an allowance for possible loan losses determined in accordance with
SFAS No. 114. The average recorded investment in impaired loans was
$3,001,000, $3,933,000 and $5,782,000, respectively, in 1997, 1996 and
1995 and the income recognized on impaired loans during 1997, 1996 and
1995 was $0, $4,000 and $19,000, respectively. Total cash collected on
impaired loans during 1997, 1996 and 1995 was $779,000, $2,427,000 and
$484,000, respectively, of which $779,000, $2,423,000 and $465,000,
respectively, was credited to the principal balance outstanding on such
loans.
The Company's policy for interest income recognition on impaired
loans is to recognize income on nonaccrual loans under the cash basis when
the loans are both current and the collateral on the loan is sufficient to
cover the outstanding obligation to the Company; if these factors do not
exist, the Company does not recognize income.
Unearned income at December 31, 1997 and 1996, includes $1,142,000
and $1,497,000, respectively, in net loan discounts on loans acquired.
Discounts on acquired loans are amortized as a yield adjustment over the
estimated lives of the respective loans.
The Company's lending activities are conducted principally in New
Hampshire and to a lesser extent in selected areas in other New England
states. The Company grants single family and multi-family residential
loans, commercial real estate loans, commercial loans, and a variety of
consumer loans. In addition, the Company grants loans for the construction
of residential homes, multi-family properties and commercial real estate
properties. Most loans granted by the Company are collateralized by real
estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally
dependent on the level of overall economic activity within the borrowers'
geographic areas, and real estate values. The ability and willingness of
commercial real estate, commercial and construction loan borrowers to
honor their repayment commitments is generally dependent on the health of
the real estate economic sector in the borrowers' geographic areas, and
the general economy.
At December 31, 1997 and 1996, the subsidiary bank serviced real
estate loans sold to others in the amounts of $163,943,000 and
$174,039,000, respectively.
<PAGE> 42
NOTE F-Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 6,253 $ 7,151 $ 7,080
Provision for possible loan losses 2,425 1,372 3,337
Loans charged off (1,205) (3,020) (3,573)
Recoveries of loans previously charged off 178 750 307
-----------------------------
Balance at end of year $ 7,651 $ 6,253 $ 7,151
=============================
</TABLE>
NOTE G-Loans to Related Parties
The Company's banking subsidiary has granted loans to its officers
and directors, and those of the Company and to their associates. The
aggregate amount of these loans was $6,864,000 and $4,583,000 at December
31, 1997 and 1996, respectively. During 1997, $6,362,000 of new loans were
made and repayments totaled $2,819,000. Approximately $1,262,000 of
related party loans at December 31, 1996 were loans to officers and
directors who were no longer associated with the Company in those
capacities at December 31, 1997.
NOTE H-Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Bank buildings $ 16,082 $ 16,430
Leasehold improvements 1,808 1,329
Furniture and equipment 10,155 10,073
--------------------
28,045 27,832
Less: Accumulated depreciation and amortization 11,972 11,031
--------------------
16,073 16,801
Land 2,785 2,782
Construction in progress 5 15
--------------------
$ 18,863 $ 19,598
====================
</TABLE>
Depreciation and amortization expense for the years ended December
31, 1997, 1996 and 1995 was $1,911,000, $1,889,000 and $1,816,000,
respectively.
NOTE I-Other Real Estate Owned
A summary of other real estate owned follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Condominiums and apartment projects $ 371 $ 780
Single family housing projects 792 1,281
Retail and office 83
Non-retail commercial 773 798
Residential 437 1,078
-----------------
2,373 4,020
Less: Valuation allowance 468 528
-----------------
$ 1,905 $ 3,492
=================
</TABLE>
An analysis of other real estate owned follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 3,492 $ 4,779 $ 7,464
Other real estate owned acquired 732 2,933 3,032
Advances for construction and other 18 58
Sales proceeds (2,376) (4,752) (3,892)
Gains on sales, net 64 149 207
Provisions for (loss) recovery subsequent
to foreclosure (25) 383 (1,897)
Transfer to premises and equipment (193)
---------------------------
Balance at end of year $ 1,905 $ 3,492 $ 4,779
===========================
</TABLE>
<PAGE> 43
An analysis of other real estate owned expense follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996 1995
------ ------ -------
(In Thousands)
<S> <C> <C> <C>
Foreclosure and holding costs, net $ 102 $ 480 $ 831
Provision for loss (recovery) subsequent
to foreclosure 25 (383) 1,897
Gains on sales, net (64) (149) (207)
-------------------------
$ 63 $ (52) $ 2,521
=========================
</TABLE>
Changes in the valuation allowance for other real estate owned were
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
------ ------- -------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 528 $ 1,605 $ 591
Provision for loss (recovery) 25 (383) 1,897
Charge offs, net (85) (694) (883)
---------------------------
Balance at end of year $ 468 $ 528 $ 1,605
===========================
</TABLE>
NOTE J-Other Assets
Goodwill and mortgage servicing rights included in other assets at
December 31, consisted of the following:
<TABLE>
<CAPTION>
1997
-----------------------------------
Net
Original Accumulated Book
Amount Amortization Value
-------- ------------ -------
(In Thousands)
<S> <C> <C> <C>
Goodwill $ 3,682 $ 1,799 $ 1,883
===================================
Mortgage servicing rights $ 1,115 $ 784 $ 331
===================================
<CAPTION>
1996
-----------------------------------
Net
Original Accumulated Book
Amount Amortization Value
-------- ------------ -------
(In Thousands)
<S> <C> <C> <C>
Goodwill $ 3,682 $ 1,553 $ 2,129
===================================
Mortgage servicing rights $ 1,001 $ 666 $ 335
===================================
</TABLE>
Mortgage servicing rights of $114,000 and $257,000 were capitalized
during 1997 and 1996.
Amortization expense for the years ended December 31, 1997, 1996 and
1995 was $418,000, $423,000 and $441,000, respectively and included
amortization on mortgage servicing rights of $118,000, $109,000 and
$110,000 in 1997, 1996 and 1995, respectively.
NOTE K-Interest Bearing Deposits
Interest bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
NOW and Super NOW accounts $ 166,773 $ 150,485
Savings accounts 89,278 87,676
Money market deposit accounts 31,486 37,510
Time certificates 290,176 270,725
----------------------
$ 577,713 $ 546,396
======================
</TABLE>
Maturities of time certificates after December 31, 1997 are
$237,705,000 in 1998, $29,222,000 in 1999, $12,985,000 in 2000, $5,915,000
in 2001, $2,974,000 in 2002 and $1,375,000 in years thereafter.
Time certificates with balances of $100,000 or more at December 31,
1997 and 1996 totaled $37,360,000 and $29,922,000, respectively.
NOTE L-Borrowings
Securities Sold Under Agreements to Repurchase
Short-term borrowings in the form of securities sold under
agreements to repurchase at December 31, 1997 and 1996, totaled
$66,025,000 and $64,961,000, respectively. Such borrowings were
collateralized at December 31, 1997 by a portion of the Company's U.S.
Treasury and U.S. Government agency securities with a carrying value of
$96,202,000 and estimated market value of $96,346,000 (see note D). The
collateral is maintained under the control of the Company in a separate
custodial account at the Federal Home Loan Bank of Boston. The weighted
average interest rate on those borrowings was 5.07% and 4.77%,
respectively, at December 31, 1997 and 1996.
The maximum amount of securities sold under agreements to repurchase at
any month end during 1997, 1996 and 1995, were $67,693,000, $64,961,000 and
<PAGE> 44
$53,373,000, respectively. The average amount of securities sold under
agreements to repurchase in 1997, 1996 and 1995 were $59,826,000, $51,220,000
and $41,250,000, respectively. The average cost of securities sold under
agreements to repurchase was 4.76%, 4.76% and 5.25% during 1997, 1996 and
1995, respectively.
Other Borrowings
The Company's subsidiary bank maintains a line of credit with the
FHLBB to meet short or long-term financing needs that may arise. Short and
long-term borrowings from the FHLBB are secured by a blanket lien on
substantially all unencumbered interest-earning assets and FHLBB stock
held. The Company's subsidiary bank is able to commingle, encumber or
dispose of any collateral held subject to its ability to maintain specific
"qualifying" collateral levels in excess of collateral maintenance
requirements and meet minimum capital ratios, both of which were met as of
December 31, 1997 and 1996.
Based upon "qualifying" collateral held, the Company's subsidiary
bank had a total borrowing capacity with the FHLBB as of December 31, 1997
of approximately $292,534,000, of which approximately $266,657,000 was
still available.
Other borrowings, all of which were with the FHLBB, consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1997
---------------------
Range of
Amount Rates (%)
-------- ---------
($ In Thousands)
<S> <C> <C>
Due within one year $ 25,269 4.69-7.05
Due from one to three years 93 5.00-6.17
Due over three years 515 5.00-6.17
--------
$ 25,877
========
<CAPTION>
December 31, 1996
---------------------
Range of
Amount Rates (%)
-------- ---------
($ In Thousands)
<S> <C> <C>
Due within one year $ 42,221 5.39-7.32
Due from one to three years 16,406 4.69-6.31
Due over three years 563 5.00-6.17
--------
$ 59,190
========
</TABLE>
Principal payments due on other borrowings after December 31, 1997
are $25,269,000 in 1998, $45,000 in 1999, $48,000 in 2000, $51,000 in
2001, $55,000 in 2002 and $409,000 in years thereafter.
NOTE M-Commitments and Contingencies
Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to originate
loans and standby letters of credit. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statement of financial condition. The
contract or notional amount of those instruments reflects the extent of
involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for loan commitments,
standby letters of credit and recourse arrangements is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet credit risk at December
31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
--------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to originate loans $ 16,673 $ 15,009
Unused lines and standby letters of credit 46,263 51,238
Unadvanced portions of construction loans 1,110 1,754
</TABLE>
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based upon management's credit
evaluation of the borrower.
<PAGE> 45
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
Derivative Financial Instruments
In 1997, the Company began using interest rate cap agreements in
managing the interest rate risk included in the consolidated balance
sheet.
With respect to interest rate caps, the Company is not exposed to
loss beyond its initial cash outlay to enter into the agreements. The cash
paid to enter into these agreements is amortized over the terms of the
agreements. The unamortized cost related to these agreements was $384,000
at December 31, 1997. The Company enters into these agreements with AAA-
rated counterparties.
Interest rate cap agreements provide for the receipt of interest to
the extent that the three-month LIBOR is greater than the strike rate. No
interest was received under these agreements during 1997.
At December 31, 1997 the Company had the following interest rate cap
agreements in effect:
<TABLE>
<CAPTION>
Notional Strike Maturity Unrealized
Amount Rate Date Loss
-------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
$ 5,000 7.50% 2/7/04 $ 69
$ 5,000 7.8125% 6/4/04 $ 52
$10,000 7.875% 11/15/04 $ 21
</TABLE>
There were no interest rate cap agreements in effect at December 31,
1996.
Investment in Limited Partnerships
At December 31, 1997, the Company was committed to invest $1,573,000
in two real estate development limited partnerships. At December 31, 1997
and 1996, the Company had $85,000 and $0, respectively, invested in such
partnerships, which are included in other assets in the consolidated
statements of financial condition.
Lease Commitments
As of December 31, 1997, the Company was obligated under
noncancelable operating leases for premises. Minimum future rentals under
leases are as follows:
<TABLE>
<CAPTION>
Amount
--------
(In Thousands)
<S> <C>
Year Ending December 31,
1998 $ 414
1999 314
2000 252
2001 227
2002 181
Thereafter 1,266
------
$2,654
======
</TABLE>
Rent expense amounted to $510,000, $519,000 and $485,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Employment and Special Termination Agreements
The subsidiary bank and the Company have entered into employment
agreements with two of its senior officers, both of which provide for a
specified minimum annual compensation and one of which provides for the
reimbursement by the Company for any excise taxes relating to a change in
control. However, such employment may be terminated for cause without
incurring any continuing obligations. The Company has also entered into
Special Termination Agreements with four other senior officers which
generally provide for certain lump sum severance payments following a
"change in control" as defined in the agreements.
Legal Proceedings
The Company is a defendant in ordinary and routine pending legal
actions incident to its business, none of which is believed by management
to be material to the financial condition of the Company.
<PAGE> 46
NOTE N-Income Taxes
The Company and its subsidiary file a consolidated Federal income
tax return on the accrual basis for taxable years ending December 31.
Income taxes (benefits) reflected in the consolidated statements of
earnings for years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Federal:
Current $ 1,947 $ 1,693 $ 1,980
Deferred 34 1,296 (694)
Effect of change in valuation allowance (1,277) (1,429) 352
State:
Current 145
-----------------------------
$ 704 $ 1,705 $ 1,638
=============================
</TABLE>
The above amounts include a tax provision on securities transactions
of $845,000, $237,000 and $111,000, in 1997, 1996 and 1995, respectively.
The income tax benefit related to the exercise of stock options
reduces taxes currently payable and is credited to additional paid-in
capital. Such amounts were $290,000 in 1997, $126,000 in 1996 and $0 in
1995.
The difference between the total expected income tax expense
computed by applying the Federal income tax rate to earnings before income
tax expense and the reported income tax expense for years ended December
31, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Computed "expected" Federal income tax expense
at statutory rate $ 1,024 $ 3,028 $ 1,401
Increase (decrease) resulting from:
Performance based stock options 367
Nondeductible merger-related charges 611
Change in valuation allowance (1,277) (1,429) 352
Change in base year reserve (43) (147)
State income tax, net of Federal tax benefit 96
Other (21) 53 32
-----------------------------
$ 704 $ 1,705 $ 1,638
=============================
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $ 1,649 $ 886
Other real estate owned 55 75
Federal and state net operating loss carryforwards 1,509 2,097
Tax credit carryforwards 218 195
Charitable contribution carryforwards 101
Core deposit intangibles 109 125
Deferred compensation 159 37
Marketable equity securities 101 101
------------------
3,800 3,617
Less: Valuation allowance 0 1,277
------------------
Total deferred tax assets 3,800 2,340
------------------
Deferred tax liabilities:
Unearned income 570 564
Premises and equipment 260 244
Deferred loan fees 185 96
Unrealized gains on securities available for sale 3,594 818
Other 131 25
------------------
Total deferred tax liabilities 4,740 1,747
------------------
Net deferred tax asset (liability) $ (940) $ 593
==================
</TABLE>
At December 31, 1997 and 1996, net deferred tax liabilities includes
$3,594,000 and $818,000, respectively, in deferred tax liabilities which
are attributable to the tax effects of net unrealized gains on securities
available for sale. Pursuant to SFAS No. 115 and SFAS No. 109, the
corresponding charge has been made directly to stockholders' equity.
As of December 31, 1997 the Company has net operating loss
carryforwards available for tax purposes of approximately $4,600,000,
which expire at various dates from the year 2006 through 2010. The
subsequent realization of net operating loss carryforwards is subject to
limitation as defined in Internal Revenue Code Section 382 due to changes
in ownership relating to acquisitions. Approximately $2,800,000 of these
net operating loss carryforwards are available for use by the Company in
1998.
SFAS No. 109 requires a valuation allowance against deferred tax
assets, if based on the weight of available evidence, it is more likely
than not that some or all of the de-
<PAGE> 47
ferred tax assets will not be realized. In prior years, management believed
that uncertainty existed with respect to future realization of a portion of
its net operating loss carryforwards and had established a valuation
allowance. In view of taxable income generated during 1996 and 1997, and upon
management's evaluation of the likelihood of realization, a portion of the
valuation allowance was reversed in 1996, with the remainder being reversed
in 1997.
The change in the valuation allowance applicable to deferred tax
assets for years ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,277 $ 2,706 $ 2,354
Increase (decrease) during the year (1,277) (1,429) 352
-----------------------------
Balance at end of year $ 0 $ 1,277 $ 2,706
=============================
</TABLE>
NOTE O-Pension Plans
Defined Benefit Pension Plan
The following table sets forth the funded status of the Company's
defined benefit pension plan as of September 30, 1997 and 1996 (the most
recent actuarial valuations):
<TABLE>
<CAPTION>
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $2,074,000 and $1,800,000, respectively $ 2,178 $ 1,942
==================
Projected benefit obligation for service rendered to date $ 2,800 $ 2,458
Plan assets at fair value, primarily fixed income and
equity securities 3,221 2,662
------------------
Plan assets in excess of projected benefit obligation 421 204
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (841) (669)
Unrecognized net liability being recognized over
approximately 12 years 190 246
------------------
Accrued pension cost $ (230) $ (219)
==================
</TABLE>
Net periodic pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1997 1996 1995
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 151 $ 144 $ 129
Interest cost on projected benefit obligation 184 171 156
Actual return on plan assets (515) (296) (378)
Net amortization and deferral 316 142 251
---------------------
Net periodic pension expense $ 136 $ 161 $ 158
=====================
</TABLE>
The weighted average discount rate of 7.25% in 1997, 7.75% in 1996
and 7.50% in 1995, and the rate of increase in future compensation levels
of 5.00% in 1997 and 5.50% in 1996 and 1995, were used in determining the
actuarial present value of the projected benefit obligation. The expected
long-term rate of return on assets was 8.00% for each year.
Supplemental Executive Retirement Plan
Effective January 1, 1993, the Company established a SERP. In August
of 1996, the Company established a Rabbi Trust, which purchased life
insurance policies to satisfy its benefit obligations thereunder. The cash
surrender value of the life insurance policies was $1,360,000 and
$1,294,000 at December 31, 1997 and 1996, respectively, and is carried in
Other Assets in the Consolidated Statements of Financial Condition. Annual
accruals for expense are paid to trusts for the benefit of the
participants. The present value of future benefits is being accrued over
the term of employment. SERP expense for the years ended December 31,
1997, 1996 and 1995 amounted to $257,000, $176,000 and $90,000,
respectively.
NOTE P-Employee Stock Ownership Plan (ESOP)
On August 19, 1986, the Company's ESOP purchased 154,350 shares of
common stock for $858,000. These funds were obtained by the ESOP through a
loan from a third party lender and repayment of the loan was guaranteed by
the Company. On October 13, 1993, the Company's ESOP purchased 39,562
shares of common stock for $250,000. These funds were obtained by the ESOP
through a loan from a third party lender and repayment of the loan was
guaranteed by the Company. Annual principal payments are ap-
<PAGE> 48
proximately $36,000 with interest at approximately 4% over the prime rate.
Company contributions are the primary source of funds for the ESOP's
repayment of the loan.
Interest expense incurred on ESOP debt was $17,000, $19,000 and
$19,000, for the years ended December 31, 1997, 1996 and 1995.
Compensation expense related to the ESOP amounted to $321,000,
$251,000 and $194,000, respectively, for the years ended December 31,
1997, 1996 and 1995 and included additional contributions in excess of
amounts required to service the ESOP debt of $175,000 in 1997 and 1996 and
$50,000 in 1995.
Dividends on unallocated shares were insignificant during 1997, 1996
and 1995.
The total shares held by the ESOP were as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Allocated shares 308,807 298,817
Unallocated shares 16,961 22,612
------------------
Total ESOP shares 325,768 321,429
==================
</TABLE>
The fair value of unallocated shares at December 31, 1997 and 1996
was $454,000 and $328,000 respectively. Unallocated shares are allocated
to employees as the ESOP debt is repaid.
NOTE Q-Stock Compensation Plans
The following are the stock option plans maintained by the Company:
Stock Option Plans
The Company maintains the 1986, 1993, 1995 and 1997 Stock Option
Plans (the "Stock Option Plans") and a Recognition and Retention Plan. The
1993 and 1995 Stock Option Plans and the Recognition and Retention Plan
relate to plans adopted by Primary Bank which were assumed by the Company
in connection with the acquisition of Primary Bank. Under the Stock Option
Plans, stock options have been granted to the executive officers and
certain officers of the Company and its subsidiary bank. Each option
entitles the holder to purchase one share of the Company's common stock at
an exercise price equal to the fair market value of the stock at the date
of grant. Options will be exercisable in whole or in part over the vesting
period and expire 10 years following the date of grant. However, all
options become 100% exercisable in the event that the employee terminates
his employment due to death, disability, normal retirement, or in the
event of a change in control.
Stock Option Plans for Outside Directors
The Company maintains the 1993, 1995 and 1997 Stock Option Plans and
a Recognition and Retention Plan for Outside Directors. The 1993 and 1995
Stock Option Plans and the Recognition and Retention Plan relate to plans
adopted by Primary Bank which were assumed by the Company in connection
with the acquisition of Primary Bank. Each member of the Board of
Directors who is not an officer or employee of the Company or the
subsidiary bank have been granted options to purchase shares of common
stock of the Company at an exercise price equal to the fair market value
of the stock at the date of grant. All of the options granted become
exercisable over the vesting period and expire 10 years following the date
of grant.
<PAGE> 49
Fixed Stock Option Plans
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
Number of Weighted Number of Weighted Number of Weighted
Unexercised Average Unexercised Average Unexercised Average
Options Option Price Options Option Price Options Option Price
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of year 490,331 $ 5.80 576,049 $ 5.52 521,947 $ 5.02
Granted 283,918 16.93 9,118 7.48 71,478 9.37
Exercised (189,024) 5.20 (93,909) 4.25 (17,376) 6.32
Canceled (625) 9.90 (927) 8.09
--------------------------------------------------------------------------------
Options at end of year 584,600 11.39 490,331 5.80 576,049 5.52
Options exercisable at year end 305,600 6.28 426,225 5.30 445,954 4.68
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Number Weighted Average Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.33 92,790 4.3 $ 3.33 92,790 $ 3.33
$6.33 to $7.52 137,854 5.8 6.38 137,854 6.38
$8.12 to $9.50 50,386 7.1 9.00 50,386 9.00
$11.09 to $13.10 20,618 7.6 11.52 20,618 11.52
$13.93 3,952 9.0 13.93 3,952 13.93
$17.00 279,000 9.3 17.00
-------------------------------------------------------------------------------
$3.33 to $17 584,600 7.4 $ 11.39 305,600 $ 6.28
===============================================================================
</TABLE>
Performance-Based Stock Option Plans
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
Number of Weighted Number of Weighted Number of Weighted
Unexercised Average Unexercised Average Unexercised Average
Options Option Price Options Option Price Options Option Price
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of year 103,616 $ 11.06 47,023 $ 11.40
Granted 56,593 10.78 47,023 $ 11.40
Exercised (36,331) 11.01
Canceled (498) 10.78
-------------------------------------------------------------------------------
Options at end of year 66,787 11.09 103,616 11.06 47,023 11.40
Options exercisable at year end 66,787 11.09 0 N/A 0 N/A
</TABLE>
The range of exercise prices for the performance-based stock option
plans are $10.78-$11.40, with a remaining average life of 8.5 years at
December 31, 1997.
Under the 1995 Stock Option Plan for Outside Directors and the 1995
Stock Option Plan for Executive Officers and Officers (the "Performance-
Based Stock Option Plans"), options vest in increments when the fair value
of the stock exceeds certain target prices, as defined, at the date of
grant. During 1997 the fair market value of the stock exceeded the target
prices and all such options fully vested. In connection with the
Performance-Based Stock Option Plans the Company recorded compensation
expense of $1,078,000 in 1997.
The fair values of the share grants were estimated on the date of
grant using the Black-Scholes option-pricing model using the following
assumptions:
<PAGE> 50
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Expected option lives 7.5 years 7 years 7 years
Expected volatility 39% 40% 40%
Risk free interest rate 6.96% 6.10% 6.63%
Expected dividend yield 1.74% N/A N/A
</TABLE>
Had compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS No. 123 for awards made after
July 1, 1995, the Company's net earnings and net earnings per share would
have been reduced to the pro forma amounts indicated below for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
($ in Thousands, except
per share data)
<S> <S> <C> <C> <C>
Net Earnings As Reported $ 2,307 $ 7,201 $ 2,482
Pro forma $ 2,070 $ 6,888 $ 1,939
Net Earnings Per Share:
Basic As Reported $ .42 $ 1.35 $ .46
Pro forma $ .38 $ 1.29 $ .36
Diluted As Reported $ .40 $ 1.28 $ .44
Pro forma $ .36 $ 1.23 $ .34
</TABLE>
NOTE R-Stockholders' Equity
Stock Split
On April 14, 1997, the Board of Directors declared a three-for-two
split of the Company's common stock, effected in the form of a 50% stock
dividend paid on May 9, 1997 to stockholders of record on April 25, 1997.
All agreements concerning stock options payable in shares of the Company's
common stock provide for the issuance of additional shares due to the
declaration of the stock split. An amount equal to the par value of the
shares issued was transferred from additional paid in capital to the
common stock account. This transfer has been reflected in the Consolidated
Statements of Stockholders' Equity at December 31, 1994. All references to
the number of shares, except shares authorized, and to per share
information in the consolidated financial statements have been adjusted to
reflect the stock split on a retroactive basis.
Stock Repurchase Program
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. No shares were repurchased
under the Program after March of 1997, and, as a result of the Merger with
Primary Bank (see note B of notes to consolidated financial statements),
the Stock Repurchase Program was terminated.
Liquidation Account
Pursuant to certain bank conversion regulations, the subsidiary bank
established a liquidation account for the benefit of eligible account
holders who maintain their savings accounts in the subsidiary bank after
conversion. In the event of a complete liquidation of the subsidiary bank,
and only in such event, eligible account holders would be entitled to
their interest in the liquidation account before any liquidiation
distribution may be made to stockholders. Their interest as to each
savings account will be in the same proportion of the total liquidation
amount as the balance of their savings account at the date of conversion
was to the balance in all savings accounts in the subsidiary bank on that
date. However, if the amount in the savings account on any annual closing
date of the subsidiary bank is less than the amount in such account at the
date of conversion, then their interest in the liquidation account will be
reduced by an amount proportionate to any such reduction and their
interest will cease to exist if such savings accounts are closed. Their
interest in the liquidation account will never be increased despite any
increase in the related savings account after conversion. The balance in
the liquidation account at December 31, 1997 was approximately $2,379,000
(unaudited).
Capital Requirements
The Company and the subsidiary bank are subject to various
regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the
subsidiary bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-
balance-sheet items
<PAGE> 51
as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsidiary bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as
defined). As of December 31, 1997, the Company and the subsidiary bank
meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the
Federal Deposit Insurance Corporation ("FDIC") categorized the Company's
wholly-owned subsidiary bank as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as well-
capitalized, the subsidiary bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There have been no conditions or events since that notification that
management believes would cause a change in the subsidiary bank's
categorization.
The Company's and the subsidiary bank's actual capital amounts and
ratios as of December 31, 1997 and 1996 are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------- ------- --------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $65,688 12.87% $40,836 >=8.00% N/A
Subsidiary Bank $63,737 12.49% $40,830 >=8.00% $51,038 >=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $59,292 11.62% $20,418 >=4.00% N/A
Subsidiary Bank $57,342 11.24% $20,415 >=4.00% $30,623 >=6.00%
Tier I Capital (to Average Assets):
Consolidated $59,292 7.47% $31,730 >=4.00% N/A
Subsidiary Bank $57,342 7.23% $31,723 >=4.00% $39,654 >=5.00%
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $61,359 13.60% $36,092 >=8.00% N/A
Subsidiary Bank $60,632 13.45% $36,074 >=8.00% $45,092 >=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $55,711 12.35% $18,047 >=4.00% N/A
Subsidiary Bank $54,987 12.19% $18,037 >=4.00% $27,055 >=6.00%
Tier I Capital (to Average Assets):
Consolidated $55,711 7.13% $31,251 >=4.00% N/A
Subsidiary Bank $54,987 7.04% $31,242 >=4.00% $39,053 >=5.00%
</TABLE>
<PAGE> 52
NOTE S-Restrictions on Subsidiary's Loans, Advances and Dividends
Bank regulatory authorities restrict the amounts available for the
payment of dividends by the subsidiary bank to the Company if the effect
thereof would cause the capital of the subsidiary bank to be reduced below
applicable capital requirements. These restrictions indirectly restrict
the Company's ability to pay common stock dividends.
Federal laws and regulations prohibit the Company from borrowing
from the subsidiary bank unless the loans are secured by specified amounts
of collateral. In addition, such secured loans to the Company from the
subsidiary bank generally are limited to 10 percent of the subsidiary
bank's capital surplus. At December 31, 1997 and 1996, no such
transactions existed between the Company and the subsidiary bank.
NOTE T-Other Noninterest Expense
Components of other noninterest expense were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Advertising and marketing $ 1,210 $ 1,026 $ 1,086
Amortization 418 423 441
Data processing 1,101 1,438 877
FDIC deposit insurance assessments 82 118 684
FDIC special assessment to recapitalize Savings
Association Insurance Fund 187
Postage and freight 552 542 492
Professional fees 817 791 810
Printing and supplies 726 570 523
Other 2,869 2,634 2,370
---------------------------
$ 7,775 $ 7,729 $ 7,283
===========================
</TABLE>
NOTE U-Supplemental Cash Flow Disclosures
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------
1997 1996 1995
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Cash paid for
Interest $ 29,010 $ 27,143 $24,737
Income taxes 2,500 1,650 1,875
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
The subsidiary bank acquired other real estate owned through
foreclosure in settlement of loans or accepted deeds in lieu of
foreclosures on real estate loans in the amount of $732,000, $2,933,000
and $3,032,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
Dividends declared and unpaid on common stock at December 31, 1997,
1996 and 1995 were $613,000, $277,000 and $244,000, respectively.
NOTE V-Fair Values of Financial Instruments
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the subsidiary bank's
entire holdings of a particular financial instrument. Because no market
exists for a significant portion of the subsidiary bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities and
therefore, are not valued pursuant to SFAS No. 107, include the mortgage
banking operation, premises and equipment, other real estate owned, core
deposit intangibles and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect
<PAGE> 53
on fair value estimates and have not been considered in many of the estimates.
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:
Cash, due from banks and interest bearing deposits in Federal Home Loan Bank
of Boston.
For cash and short term investments having maturities of 90 days or
less, the carrying amounts reported in the consolidated statements of
financial condition approximate fair values.
Securities held to maturity, securities available for sale and stock in
Federal Home Loan Bank of Boston.
The fair value of securities held to maturity and securities
available for sale is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. Ownership
of stock in FHLBB is restricted to member banks; therefore, the stock is
not traded. The estimated fair value of stock in FHLBB, which approximates
carrying value, represents the price at which the subsidiary bank could
liquidate its holdings.
Loans held for sale
Loans actively traded in the secondary mortgage market have been
valued using current investor yield requirements.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, construction,
and other consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and nonperforming
categories.
The fair value of performing loans, except residential mortgage
loans, is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the subsidiary bank's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions. For
performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources adjusted to reflect
differences in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash flows
are discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market
information and specific borrower information.
Mortgage Servicing Rights
A valuation model that calculates the present value of future cash
flows is used to estimate such fair values. This valuation model
incorporates assumptions that market participants would use in estimating
future net servicing income including estimates of the cost of servicing
loans, discount rate, float value, ancillary income, prepayment speeds and
default rates.
Accrued interest receivable
The carrying value of accrued interest receivable on securities and
loans, included in other assets, approximates its fair value.
Deposits
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as non-interest bearing deposits, NOW, Super NOW, regular
savings and money market deposit accounts, is equal to the amount payable
on demand. The fair value estimates do not include the benefit that
results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market. The fair value
estimate of time certificates is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase
The fair value estimate of securities sold under agreements to
repurchase approximates carrying value because they generally mature
within ninety days and bear market interest rates.
Other Borrowings
The fair value of other borrowings is based upon the discounted
value of contractual cash flows. The discount
<PAGE> 54
rate is estimated using the rates currently offered for borrowings of
similar maturities.
Accrued interest payable
The carrying value of accrued interest payable on deposits and
borrowings, included in other liabilities, approximates its fair value.
Off-balance sheet instruments
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
excluding those committed for sale to the secondary market, fair value
also considers the difference between current levels of interest rates and
the committed rates. The fair value of financial guarantees written and
letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties. It is management's belief that
the fair value estimate of commitments to extend credit are not material,
at December 31, 1997 and 1996, because most mature within one year, do not
present any unanticipated credit concerns and bear market interest rates.
The fair values of the interest rate cap agreements are based on
dealer quotes.
The following presents the carrying value and estimated fair value
of the Company's financial instruments at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 28,677 $ 28,677 $ 30,559 $ 30,559
Interest bearing deposits in Federal Home Loan
Bank of Boston 27,452 27,452 17,993 17,993
Securities held to maturity 33,910 34,170 84,403 83,792
Stock in Federal Home Loan Bank of Boston 7,201 7,201 6,365 6,365
Securities available for sale 178,680 178,680 182,462 182,462
Net loans 500,082 506,317 434,184 438,320
Loans held for sale 1,068 1,068 1,025 1,025
Mortgage servicing rights 331 679 335 704
Accrued interest receivable 5,627 5,627 5,761 5,761
Financial Liabilities
Deposits (with no stated maturity) 358,807 358,807 338,942 338,942
Time deposits 290,176 290,772 270,725 271,685
Securities sold under agreements to repurchase 66,025 66,025 64,961 64,961
Other borrowings 25,877 25,883 59,190 59,056
Accrued interest payable 1,032 1,032 1,142 1,142
<CAPTION>
Contractual Contractual
or Notional Fair or Notional Fair
Amount Value Amount Value
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Off-balance sheet instruments
Commitments to extend credit $ 64,046 $ 0 $ 68,001 $ 0
Interest rate cap agreements 20,000 (142) 0 0
</TABLE>
<PAGE> 55
NOTE W-Condensed Parent Company Only Financial Information
Condensed financial statements of Granite State Bankshares, Inc.
(the "Parent Company"), as of December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996 and 1995, are as follows:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Assets
Interest bearing deposits in subsidiary bank $ 2,500 $ 719
Investment in subsidiary bank, at equity 65,070 58,928
Other assets 70 230
--------------------
$ 67,640 $ 59,877
====================
Liabilities $ 726 $ 448
Stockholders' equity 66,914 59,429
--------------------
$ 67,640 $ 59,877
====================
</TABLE>
Statements of Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Revenues
Interest income from subsidiary bank $ 29 $ 20 $ 31
Dividend income from subsidiary bank 3,000 2,000 2,000
---------------------------
Total revenue 3,029 2,020 2,031
Operating expenses 254 20 31
---------------------------
Earnings before income taxes and equity in undistributed
earnings (loss) of subsidiary bank 2,775 2,000 2,000
Income tax benefits (68)
---------------------------
Earnings before equity in undistributed earnings (loss) of
subsidiary bank 2,843 2,000 2,000
Equity in undistributed earnings (loss) of subsidiary bank (536) 5,201 482
---------------------------
Net earnings $ 2,307 $ 7,201 $ 2,482
===========================
</TABLE>
<PAGE> 56
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,307 $ 7,201 $ 2,482
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Equity in undistributed (earnings) loss of subsidiary
bank 536 (5,201) (482)
Decrease in other assets 228 1 3
Decrease in other liabilities (22) (7) (1)
Decrease in unearned compensation-ESOP 36 36 99
Deferred income tax benefits (68)
-----------------------------
Net cash provided by operating activities 3,017 2,030 2,101
-----------------------------
Cash flows from investing activities:
(Increase) decrease in interest bearing deposits with
subsidiary bank (1,781) 748 (309)
-----------------------------
Net cash provided by (used in) investing activities (1,781) 748 (309)
-----------------------------
Cash flows from financing activities:
Dividends paid on common stock (1,285) (1,083) (998)
Proceeds from issuance of common stock 390 217
Purchase of treasury stock (305) (1,876) (695)
Payments made on long-term debt (36) (36) (99)
-----------------------------
Net cash used in financing activities (1,236) (2,778) (1,792)
-----------------------------
Net increase (decrease) in cash 0 0 0
Cash at beginning of year 0 0 0
-----------------------------
Cash at end of year $ 0 $ 0 $ 0
=============================
</TABLE>
The Parent Company's Statements of Stockholders' Equity are
identical to the Consolidated Statements of Stockholders' Equity and
therefore, are not reprinted here.
The Company has no material contingencies, commitments or long-term
obligations other than those disclosed elsewhere in the accompanying Notes
to Consolidated Financial Statements.
<PAGE> 57
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the quarterly results of operations
for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997<F1>
----------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
---------- --------- --------- ---------
($ In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income
Loans $ 11,233 $ 10,913 $ 10,370 $ 9,791
Securities available for sale 2,337 2,389 2,907 2,724
Securities held to maturity 896 1,313 1,415 1,486
Interest bearing deposits in Federal Home Loan Bank
of Boston 302 162 140 177
Dividends on Federal Home Loan Bank of Boston stock 119 117 116 104
---------------------------------------------
Total interest and dividend income 14,887 14,894 14,948 14,282
---------------------------------------------
Interest expense
Deposits 6,038 5,918 5,797 5,569
Other borrowed funds 1,010 1,350 1,624 1,594
---------------------------------------------
Total interest expense 7,048 7,268 7,421 7,163
---------------------------------------------
Net interest and dividend income 7,839 7,626 7,527 7,119
Provision for possible loan losses 800 700 700 225
---------------------------------------------
Net interest and dividend income after provision
for possible loan losses 7,039 6,926 6,827 6,894
Noninterest income<F4> 1,024 1,500 1,332 3,243
Noninterest expense<F3> 12,681 6,163 6,803 6,127
---------------------------------------------
Earnings (loss) before income taxes (4,618) 2,263 1,356 4,010
Income taxes (benefits) (1,592) 587 536 1,173
---------------------------------------------
NET EARNINGS (LOSS)<F3> $ (3,026) $ 1,676 $ 820 $ 2,837
=============================================
Net earnings (loss) per share-basic<F2><F5> $ (.55) $ .31 $ .15 $ .52
Net earnings (loss) per share-diluted<F2><F5> $ (.55) $ .29 $ .14 $ .50
Annualized Returns
Return on average assets (1.50)% .82% .40% 1.44%
Return on average stockholders' equity (18.02)% 10.18% 5.29% 18.97%
<FN>
- --------------------
<F1> After the close of business October 31, 1997, the Company acquired
Primary Bank, a state-chartered guaranty (stock) savings bank. The
transaction was accounted for as a pooling of interests. Accordingly,
all prior period balances have been restated to reflect this transaction
as if the combination had been in effect for all periods presented.
<F2> Per share data has been restated to reflect the Company's three-
for-two stock split effected in the form of a 50% stock dividend paid
May 9, 1997 to stockholders of record April 25, 1997.
<F3> The Company recorded $5,917,000 in merger-related charges in the
forth quarter of 1997 in connection with the acquisition of Primary
Bank as discussed in <F1> above. The after-tax amount of these costs
were $4,325,000.
<F4> Included in noninterest income are net gains (losses) on sales of
securities available for sale of $(1,000), $115,000, $13,000 and
$2,060,000 in the fourth quarter, third quarter, second quarter and
first quarter, respectively.
<F5> Earnings per share is calculated by dividing net earnings by the
average common shares outstanding for each quarter. Therefore, the sum
of earnings per share for the quarters may not equal total earnings
per share for the year.
</FN>
</TABLE>
<PAGE> 58
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)-Continued
<TABLE>
<CAPTION>
1996<F1>
------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
($ In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income
Loans $ 9,834 $ 9,486 $ 9,183 $ 9,466
Securities available for sale 2,542 2,683 2,782 2,557
Securities held to maturity 1,469 1,241 1,116 796
Interest bearing deposits in Federal Home Loan Bank
of Boston 279 166 76 336
Dividends on Federal Home Loan Bank of Boston stock 101 102 106 109
-----------------------------------------------
Total interest and dividend income 14,225 13,678 13,263 13,264
-----------------------------------------------
Interest expense
Deposits 5,592 5,505 5,399 5,503
Other borrowed funds 1,469 1,402 1,234 1,139
-----------------------------------------------
Total interest expense 7,061 6,907 6,633 6,642
-----------------------------------------------
Net interest and dividend income 7,164 6,771 6,630 6,622
Provision for possible loan losses 86 540 467 279
-----------------------------------------------
Net interest and dividend income after provision
for possible loan losses 7,078 6,231 6,163 6,343
Noninterest income<F3> 1,326 1,511 1,514 1,380
Noninterest expense 5,941 5,528 5,594 5,577
-----------------------------------------------
Earnings before income taxes 2,463 2,214 2,083 2,146
Income taxes 475 404 348 478
-----------------------------------------------
NET EARNINGS $ 1,988 $ 1,810 $ 1,735 $ 1,668
===============================================
Net earnings per share-primary<F2> $ .38 $ .34 $ .32 $ .31
Net earnings per share-diluted<F2><F4> $ .36 $ .32 $ .31 $ .30
Annualized Returns
Return on average assets 1.01% .96% .94% .92%
Return on average stockholders' equity 13.66% 13.11% 12.76% 11.97%
<FN>
- --------------------
<F1> After the close of business October 31, 1997, the Company acquired
Primary Bank, a state-chartered guaranty (stock) savings bank. The
transaction was accounted for as a pooling of interests. Accordingly,
all prior period balances have been restated to reflect this transaction
as if the combination had been in effect for all periods presented.
<F2> Per share data has been restated to reflect the Company's three-
for-two stock split effected in the form of a 50% stock dividend paid
May 9, 1997 to stockholders of record April 25, 1997 and for the stock
dividend declared by Primary Bank in the fourth quarter of 1996.
<F3> Included in noninterest income are net gains on sales of securities
available for sale of $119,000, $189,000, $123,000 and $219,000 for
the fourth quarter, third quarter, second quarter and first quarter,
respectively.
<F4> Earnings per share is calculated by dividing net earnings by the
average common shares outstanding for each quarter. Therefore, the sum
of earnings per share for the quarters may not equal total earnings per
share for the year.
</FN>
</TABLE>
<PAGE> 59
SELECTED CONSOLIDATED FINANCIAL DATA
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
At or for Years Ended December 31,<F1>
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
($ In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total assets $ 813,670 $ 797,840 $ 728,724 $ 668,310 $ 635,743
Net loans 500,082 434,184 416,979 400,742 395,550
Loans held for sale 1,068 1,025 1,985 834 1,969
Investments<F3> 219,791 273,230 218,229 205,792 166,893
Deposits 648,983 609,667 591,123 520,099 517,195
Securities sold under agreements to repurchase 66,025 64,961 49,958 39,113 19,775
Other borrowings 25,877 59,190 28,499 56,143 47,399
Stockholders' equity 66,914 59,429 54,755 48,636 48,413
OPERATING DATA:
Interest and dividend income $ 59,011 $ 54,430 $ 51,798 $ 43,583 $ 39,540
Interest expense 28,900 27,243 25,018 18,721 18,663
-----------------------------------------------------------------
Net interest and dividend income 30,111 27,187 26,780 24,862 20,877
Provision for possible loan losses 2,425 1,372 3,337 1,032 1,825
Net gains (losses) on securities 2,187 650 338 (127) 852
Other noninterest income 4,912 5,081 4,703 4,561 5,118
Noninterest expense<F6> 31,774 22,640 24,364 22,633 21,652
-----------------------------------------------------------------
Earnings before income taxes and cumulative effect
of change in accounting principle 3,011 8,906 4,120 5,631 3,370
Applicable income taxes 704 1,705 1,638 562 521
-----------------------------------------------------------------
Earnings before cumulative effect of change in
accounting principle 2,307 7,201 2,482 5,069 2,849
Cumulative effect on years prior to 1993 of a change
in accounting principle 205
-----------------------------------------------------------------
Net earnings<F6> $ 2,307 $ 7,201 $ 2,482 $ 5,069 $ 3,054
=================================================================
Preferred stock dividends $ 228
Net earnings applicable to common stock $ 2,307 $ 7,201 $ 2,482 $ 5,069 $ 2,826
PER SHARE DATA:
Net earnings per share-basic<F2> $ .42 $ 1.35 $ .46 $ .93 $ N/A<F5>
=================================================================
Net earnings per share-diluted<F2> $ .40 $ 1.28 $ .44 $ .88 $ N/A<F5>
=================================================================
Cash dividends declared on common stock<F2> $ .29 $ .20 $ .18 $ .14 $ N/A<F5>
Financial Ratios<F4>:
Return on average assets .29% .95% .35% .76% .49%
Return on average stockholders' equity 3.57% 12.88% 4.56% 10.06% 7.71%
<FN>
- --------------------
<F1> After the close of business October 31, 1997, the Company acquired
Primary Bank, a state-chartered guaranty (stock) savings bank. The
transaction was accounted for as a pooling of interests. Accordingly,
all prior period balances have been restated to reflect this
transaction as if the combination had been in effect for all periods
presented.
<F2> Per share data has been restated to reflect the Company's three-
for-two stock split effected in the form of a 50% stock dividend paid
May 9, 1997 to stockholders of record April 25, 1997 and for the stock
dividends declared by Primary Bank in 1996 and 1995.
<F3> Investments include securities held to maturity, securities
available for sale, trading securities and stock in the Federal Home
Loan Bank of Boston.
<F4> Financial ratios are based on net earnings.
<F5> Per share data for 1993 has not been presented because it is not
meaningful, since Primary Bank, which was acquired as discussed in <F1>
above, did not become a public company until October 13, 1993.
<F6> The Company recorded $5,917,000 in merger-related charges associated
with the acquisition of Primary Bank as discussed in <F1> above. The
after-tax amount of these costs was $4,325,000.
</FN>
</TABLE>
<PAGE> 60
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT-GRANT THORNTON LLP
Consent of Independent Certified Public Accountants
We have issued our report dated January 12, 1998 accompanying the
consolidated financial statements incorporated by reference in the
Annual Report of Granite State Bankshares, Inc. and Subsidiary on Form
10-K for the year ended December 31, 1997. We hereby consent to the
incorporation by reference of said report in the Registration Statements
of Granite State Bankshares, Inc. and Subsidiary on Form S-8 (File No.
33-57720, effective February 1, 1993) and on Form S-8 (File No.
333-42287, effective December 15, 1997).
/s/ Grant Thornton LLP
Boston, Massachusetts
March 27, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT-KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report, included herein,
in the Registration Statements of Granite State Bankshares, Inc. and
Subsidiary on Form S-8 (Nos. 33-57720 and 333-42287).
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FINANCIAL DATA SCHEDULE - FISCAL YEAR END 1997
This schedule contains summary financial information extracted from the Form
10-K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 28,677
<INT-BEARING-DEPOSITS> 27,452
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 178,680<F1>
<INVESTMENTS-CARRYING> 33,910
<INVESTMENTS-MARKET> 34,170
<LOANS> 507,733<F2>
<ALLOWANCE> 7,651
<TOTAL-ASSETS> 813,670
<DEPOSITS> 648,983
<SHORT-TERM> 66,025<F3>
<LIABILITIES-OTHER> 31,748<F4>
<LONG-TERM> 0
0
0
<COMMON> 6,494
<OTHER-SE> 60,420
<TOTAL-LIABILITIES-AND-EQUITY> 813,670
<INTEREST-LOAN> 42,307
<INTEREST-INVEST> 15,467
<INTEREST-OTHER> 1,237
<INTEREST-TOTAL> 59,011
<INTEREST-DEPOSIT> 23,322
<INTEREST-EXPENSE> 28,900
<INTEREST-INCOME-NET> 30,111
<LOAN-LOSSES> 2,425
<SECURITIES-GAINS> 2,187
<EXPENSE-OTHER> 31,774
<INCOME-PRETAX> 3,011
<INCOME-PRE-EXTRAORDINARY> 2,307
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,307
<EPS-PRIMARY> .42
<EPS-DILUTED> .40
<YIELD-ACTUAL> 4.07
<LOANS-NON> 7,145
<LOANS-PAST> 535
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,253
<CHARGE-OFFS> 1,205
<RECOVERIES> 178
<ALLOWANCE-CLOSE> 7,651
<ALLOWANCE-DOMESTIC> 7,651
<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
<F4> Includes other borrowings with the Federal Home Loan Bank of Boston
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE - FISCAL YEAR ENDS 1995, 1996, AND QTRS.
1,2,3 OF 1996
</LEGEND>
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 28,811 30,559 26,689 32,942 28,177
<INT-BEARING-DEPOSITS> 24,239 17,993 4,788 482 21,386
<FED-FUNDS-SOLD> 0 0 0 0 0
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 165,284<F1> 182,462<F1> 190,184<F1> 190,993<F1> 160,824<F1>
<INVESTMENTS-CARRYING> 45,387 84,403 65,669 72,737 89,348
<INVESTMENTS-MARKET> 45,329 83,792 64,805 70,991 87,771
<LOANS> 424,130<F2> 440,437<F2> 415,931<F2> 419,049<F2> 428,017<F2>
<ALLOWANCE> 7,151 6,253 7,084 6,451 6,492
<TOTAL-ASSETS> 728,724 797,840 741,317 759,984 771,485
<DEPOSITS> 591,123 609,667 591,642 598,070 603,712
<SHORT-TERM> 49,958<F3> 64,961<F3> 45,356<F3> 45,300<F3> 53,646<F3>
<LIABILITIES-OTHER> 32,888<F4> 63,783<F4> 49,936<F4> 62,073<F4> 57,343<F4>
<LONG-TERM> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 6,055 6,264 6,170 6,173 6,196
<OTHER-SE> 48,700 53,165 48,213 48,368 50,588
<TOTAL-LIABILITIES-AND-EQUITY> 728,724 797,840 741,317 759,984 771,485
<INTEREST-LOAN> 38,036 37,969 9,466 18,649 28,135
<INTEREST-INVEST> 12,285 15,186 3,353 7,251 11,175
<INTEREST-OTHER> 1,477 1,275 445 627 895
<INTEREST-TOTAL> 51,798 54,430 13,264 26,527 40,205
<INTEREST-DEPOSIT> 20,108 21,999 5,503 10,902 16,407
<INTEREST-EXPENSE> 25,018 27,243 6,642 13,275 20,182
<INTEREST-INCOME-NET> 26,780 27,187 6,622 13,252 20,023
<LOAN-LOSSES> 3,337 1,372 279 746 1,286
<SECURITIES-GAINS> 338 650 219 342 531
<EXPENSE-OTHER> 24,364 22,640 5,577 11,171 16,699
<INCOME-PRETAX> 4,120 8,906 2,146 4,229 6,443
<INCOME-PRE-EXTRAORDINARY> 2,482 7,201 1,668 3,403 5,213
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 2,482 7,201 1,668 3,403 5,213
<EPS-PRIMARY> .46 1.35 .31 .64 .98
<EPS-DILUTED> .44 1.28 .30 .60 .93
<YIELD-ACTUAL> 4.10 3.91 3.96 3.93 3.90
<LOANS-NON> 7,707 4,086 7,500 5,852 5,513
<LOANS-PAST> 0 93 525 15 0
<LOANS-TROUBLED> 423 380 145 328 319
<LOANS-PROBLEM> 0 0 0 0 0
<ALLOWANCE-OPEN> 7,080 7,151 7,151 7,151 7,151
<CHARGE-OFFS> 3,573 3,020 732 1,981 2,625
<RECOVERIES> 307 750 386 535 680
<ALLOWANCE-CLOSE> 7,151 6,253 7,084 6,451 6,492
<ALLOWANCE-DOMESTIC> 7,151 6,253 7,084 6,451 6,492
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0 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
<F4>Includes other borrowings with the Federal Home Loan Bank of Boston
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE - QTRS. 1,2,3 OF 1997
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 29,265 36,852 33,668
<INT-BEARING-DEPOSITS> 12,384 7,351 18,692
<FED-FUNDS-SOLD> 0 0 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 192,077<F1> 172,585<F1> 146,083<F1>
<INVESTMENTS-CARRYING> 84,895 80,237 71,127
<INVESTMENTS-MARKET> 83,142 79,508 71,091
<LOANS> 452,706<F2> 480,266<F2> 494,043<F2>
<ALLOWANCE> 6,199 6,517 7,018
<TOTAL-ASSETS> 813,044 825,712 804,100
<DEPOSITS> 626,595 640,509 645,403
<SHORT-TERM> 50,848<F3> 55,117<F3> 58,943<F3>
<LIABILITIES-OTHER> 74,386<F4> 65,947<F4> 32,602<F4>
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 6,346 6,346 6,376
<OTHER-SE> 54,869 57,793 60,776
<TOTAL-LIABILITIES-AND-EQUITY> 813,044 825,712 804,100
<INTEREST-LOAN> 9,791 20,161 31,074
<INTEREST-INVEST> 4,210 8,532 12,234
<INTEREST-OTHER> 281 537 816
<INTEREST-TOTAL> 14,282 29,230 44,124
<INTEREST-DEPOSIT> 5,569 11,366 17,284
<INTEREST-EXPENSE> 7,163 14,584 21,852
<INTEREST-INCOME-NET> 7,119 14,646 22,272
<LOAN-LOSSES> 225 925 1,625
<SECURITIES-GAINS> 2,060 2,073 2,188
<EXPENSE-OTHER> 6,127 12,930 19,093
<INCOME-PRETAX> 4,010 5,366 7,629
<INCOME-PRE-EXTRAORDINARY> 2,837 3,657 5,333
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,837 3,657 5,333
<EPS-PRIMARY> .52 .68 .98
<EPS-DILUTED> .50 .64 .93
<YIELD-ACTUAL> 3.93 3.97 4.01
<LOANS-NON> 4,350 4,163 4,765
<LOANS-PAST> 173 299 262
<LOANS-TROUBLED> 371 87 70
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 6,253 6,253 6,253
<CHARGE-OFFS> 314 737 993
<RECOVERIES> 35 76 133
<ALLOWANCE-CLOSE> 6,199 6,517 7,018
<ALLOWANCE-DOMESTIC> 6,199 6,517 7,018
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 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
<F4>Includes other borrowings with the Federal Home Loan Bank of Boston
</FN>
</TABLE>
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT OF PRIMARY BANK
Independent Auditors' Report
The Board of Directors
Primary Bank:
We have audited the accompanying balance sheets of Primary Bank as of
December 31, 1996, and the related statements of operations,
changes in stockholders' equity, and cash flows for each of the years in
the two-year period ended December 31, 1996. These financial
statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Primary Bank
at December 31, 1996, and the results of its operations and its
cash flows for each of the years in the two-year period ended December
31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 23, 1997
