FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For quarterly period ended March 31, 1999
Commission File No. 0-14895
Granite State Bankshares, Inc.
(Exact name of registrant as specified in its charter)
New Hampshire 02-0399222
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
122 West Street, Keene, New Hampshire 03431
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (603) 352-1600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ( X ) No ( )
The number of shares outstanding of each of the issuer's classes of
common stock, as of May 7, 1999 was 5,856,481, $1.00 par value per share.
INDEX
Granite State Bankshares, Inc. and Subsidiary
Part I Financial Information Page
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Earnings
Three months ended March 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income
Three months ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
<TABLE>
<CAPTION>
Granite State Bankshares, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Financial Condition
March 31, December 31,
($ in thousands, except par values) 1999 1998
---------- ------------
<S> <C> <C>
(Unaudited)
ASSETS
Cash and due from banks $ 17,449 $ 23,506
Interest bearing deposits in other banks,
at cost which approximates market value 16,862 19,532
Securities available for sale (amortized cost
$205,985 at March 31, 1999 and $217,186 at
December 31, 1998) 206,695 219,765
Securities held to maturity (market value
$17,958 at March 31, 1999 and $22,548 at
December 31, 1998) 18,022 22,277
Stock in Federal Home Loan Bank of Boston 7,201 7,201
Loans held for sale 1,543 1,828
Loans 556,448 555,699
Less: Unearned income (1,487) (1,506)
Allowance for possible loan losses (7,025) (7,122)
------- -------
Net loans 547,936 547,071
Premises and equipment 17,768 17,700
Other real estate owned 1,780 1,601
Other assets 17,492 17,666
------- -------
Total assets $ 852,748 $ 878,147
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits $ 571,040 $ 576,778
Noninterest bearing deposits 70,595 73,709
------- -------
Total deposits 641,635 650,487
Securities sold under agreements to repurchase 54,740 70,905
Other borrowings 80,597 80,608
Other liabilities 3,538 3,547
------- -------
Total liabilities 780,510 805,547
Preferred stock, $1.00 par value; authorized
7,500,000 shares; none issued
Common stock, $1.00 par value; authorized
12,500,000 shares; 6,789,582 issued at
March 31, 1999 and December 31, 1998 6,790 6,790
Additional paid-in capital 37,909 38,018
------ ------
44,699 44,808
Accumulated other comprehensive income 435 1,583
Retained earnings 34,445 32,998
------ ------
79,579 79,389
Less: Treasury stock, at cost, 919,101 and
889,759 shares at March 31, 1999 and
December 31, 1998, respectively (6,692) (6,065)
Unallocated common stock acquired by
the ESOP (71) (71)
Unearned restricted stock (578) (653)
------- -------
Total stockholders' equity 72,238 72,600
------- -------
Total liabilities and stockholders' equity $ 852,748 $ 878,147
======= =======
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Granite State Bankshares, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Earnings
Three Months Ended
March 31,
($ in thousands, except per share data) --------------------
1999 1998
-------- --------
<S> <C> <C>
(Unaudited)
Interest and dividend income:
Loans $ 11,296 $ 11,275
Debt securities available for sale 2,801 2,276
Marketable equity securities available for sale 182 179
Securities held to maturity 382 520
Dividends on Federal Home Loan Bank of Boston stock 114 116
Other interest 95 81
------ ------
14,870 14,447
Interest expense:
Deposits 5,263 5,768
Securities sold under agreements to repurchase 637 758
Other borrowings 1,062 160
------ ------
6,962 6,686
Net interest and dividend income 7,908 7,761
Provision for possible loan losses 50 300
------ ------
Net interest and dividend income after
provision for possible loan losses 7,858 7,461
Noninterest income:
Customer account fees and service charges 628 572
Mortgage service fees 125 148
Net gains on sales of securities available for sale 5 1,099
Net gains on sales of loans 153 132
Other 203 296
------ ------
1,114 2,247
Noninterest expense:
Salaries and benefits 2,909 2,975
Occupancy and equipment 1,086 1,017
Other real estate owned 90 127
Other 1,361 1,740
------ ------
5,446 5,859
------ ------
Earnings before income taxes 3,526 3,849
Income taxes 1,256 1,342
------ ------
Net earnings $ 2,270 $ 2,507
====== ======
Shares used in computing net earnings per share:
Basic 5,830,661 5,747,055
Diluted 5,978,915 5,969,875
Net earnings per share -basic $ 0.39 $ 0.44
Net earnings per share -diluted $ 0.38 $ 0.42
Cash dividends declared per share $ 0.14 $ 0.125
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Granite State Bankshares, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
--------------------
($ in thousands) 1999 1998
-------- --------
<S> <C> <C>
(Unaudited)
Net earnings $ 2,270 $ 2,507
Other comprehensive income (loss):
Unrealized holding gains (losses) arising
during the period (1,865) 1,015
Related income tax effects 720 (392)
------ ------
Net unrealized holding gains (losses),
net of related income tax effects (1,145) 623
------ ------
Less: reclassification adjustment for gains realized
in net earnings:
Realized gains (5) (1,099)
Related income tax effects 2 424
------ ------
Net reclassification adjustment (3) (675)
------ ------
Total other comprehensive loss (1,148) (52)
------ ------
Comprehensive Income $ 1,122 $ 2,455
====== ======
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Granite State Bankshares, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
--------------------
Increase (decrease) in cash ($ In Thousands) 1999 1998
-------- --------
<S> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net earnings $ 2,270 $ 2,507
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for possible loan losses 50 300
Provision for depreciation and amortization 595 595
Net (accretion) amortization of security discounts
and premiums 56 (58)
Provision for loss on other real estate owned 23
Realized gains on sales of securities available
for sale, net (5) (1,099)
Loans originated for sale (6,324) (7,517)
Proceeds from sale of loans originated for sale 6,762 7,497
Realized gains on sales of loans (153) (132)
Increase (decrease) in unearned income (19) 42
Realized (gains) losses on sales of other real
estate owned (1) 34
Deferred income taxes 654 98
Decrease in other assets 206 1,145
Decrease in other liabilities (95) (1,939)
Decrease in unearned restricted stock 75
------ ------
Net cash provided by operating activities 4,071 1,496
Cash flows from investing activities:
Proceeds from maturities and calls of securities
held to maturity 4,300 19,765
Proceeds from sales of securities available for sale 1,479
Proceeds from maturities and calls of securities
available for sale 15,000 28,250
Purchase of securities available for sale (5,509) (2,586)
Principal payments received on securities available
for sale 1,613 1,792
Loan originations, net of repayments (1,437) (19,865)
Purchase of premises and equipment (549) (607)
Proceeds from sales of other real estate owned 363 259
Net decrease in interest-bearing deposits in
other banks 2,670 17,721
Other (13)
------ ------
Net cash provided by investing activities 16,451 46,195
Cash flows from financing activities:
Net increase (decrease) in demand, NOW, money market
deposit and savings accounts (3,705) 6,647
Net decrease in time certificates (5,147) (22,370)
Net decrease in securities sold under agreements
to repurchase (16,165) (3,347)
Net decrease in other borrowings (11) (20,292)
Proceeds from issuance of common stock 1,849
Reissuance of common stock from treasury 216
Purchase of treasury stock (1,030)
Dividends paid on common stock (737) (620)
------- -------
Net cash used in financing activities (26,579) (38,133)
------- -------
Net increase (decrease) in cash and due from banks (6,057) 9,558
Cash and due from banks at beginning of period 23,506 28,677
------- -------
Cash and due from banks at end of period $ 17,449 $ 38,235
======= =======
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Granite State Bankshares, Inc. and Subsidiary
Part I - Financial Information
Item 1. Financial Statements
Notes to Unaudited Consolidated Financial Statements
March 31, 1999
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
current fiscal year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1998.
Note 2. Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share 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. Information regarding the computation of
earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
1999 1998
-------- --------
<S> <C> <C>
($ in Thousands, except per share data)
Net earnings $ 2,270 $ 2,507
====== ======
Weighted average common
shares outstanding-Basic 5,830,661 5,747,055
Dilutive effect of stock
options computed using
the treasury stock method 148,254 222,820
--------- ---------
Weighted average common
shares outstanding-Diluted 5,978,915 5,969,875
========= =========
Net earnings per share-Basic $ 0.39 $ 0.44
====== ======
Net earnings per share-Diluted $ 0.38 $ 0.42
====== ======
</TABLE>
Weighted average options to purchase 75,000 shares of common stock were
outstanding at March 31, 1999, 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. All options
to purchase shares at March 31, 1998 were included in the computation of
weighted average common shares outstanding for purposes of computing diluted
earnings per share.
Note 3. 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 part of accumulated
other comprehensive income, net of related income tax effects. At March 31, 1999
and December 31, 1998, the Company had no securities classified as trading
securities.
The amortized cost, estimated market value and carrying value of
securities at March 31, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Amortized Estimated Carrying
At March 31, 1999 Cost Market Value Value
--------- ------------ --------
<S> <C> <C> <C>
(In Thousands)
Securities held to maturity
US Government agency obligations $ 13,011 $ 12,980 $ 13,011
Other corporate obligations 5,011 4,978 5,011
------- ------- -------
Total securities held to maturity $ 18,022 $ 17,958 $ 18,022
======= ======= =======
Securities available for sale
US Treasury obligations $ 72,523 $ 73,269 $ 73,269
US Government agency obligations 55,969 55,606 55,606
Other corporate obligations 46,577 46,458 46,458
Mortgage-backed securities:
FNMA 6,236 6,244 6,244
FHLMC 2,219 2,214 2,214
GNMA 1,014 1,069 1,069
SBA 490 500 500
------ ------ ------
Total mortgage-backed securities 9,959 10,027 10,027
Mutual Funds 6,403 6,447 6,447
Marketable equity securities 14,554 14,888 14,888
------- ------- -------
Total securities available for sale $ 205,985 $ 206,695 $ 206,695
======= ======= =======
<CAPTION>
Amortized Estimated Carrying
At December 31, 1998 Cost Market Value Value
--------- ------------ ---------
<S> <C> <C> <C>
(In Thousands)
Securities held to maturity
US Government agency obligations $ 17,265 $ 17,495 $ 17,265
Other corporate obligations 5,012 5,053 5,012
------ ------ ------
Total securities held to maturity $ 22,277 $ 22,548 $ 22,277
====== ====== ======
Securities available for sale
US Treasury obligations $ 82,521 $ 83,716 $ 83,716
US Government agency obligations 55,961 55,998 55,998
Other corporate obligations 46,593 46,457 46,457
Mortgage-backed securities:
FNMA 7,045 7,031 7,031
FHLMC 2,876 2,853 2,853
GNMA 1,190 1,246 1,246
SBA 552 568 568
------ ------ ------
Total mortgage-backed securities 11,663 11,698 11,698
Mutual Funds 6,326 6,402 6,402
Marketable equity securities 14,122 15,494 15,494
------- ------- -------
Total securities available for sale $ 217,186 $ 219,765 $ 219,765
======= ======= =======
</TABLE>
Note 4. Loans
Loans consist of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
(In Thousands)
Commercial, financial and agricultural $ 42,960 $ 48,418
Real estate-residential 336,506 328,243
Real estate-commercial 143,971 146,093
Real estate-construction and
land development 2,763 2,281
Installment 7,057 7,809
Other 23,191 22,855
------- -------
Total loans 556,448 555,699
Less:
Unearned income (1,487) (1,506)
Allowance for possible loan losses (7,025) (7,122)
------- -------
Net loans $ 547,936 $ 547,071
======= =======
</TABLE>
Real estate mortgage loans and other loans are stated at the amount of
unpaid principal, less unearned income and the allowance for possible loan
losses.
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. When management determines that significant doubt
exists as to collectibility of principal or interest on a loan, the loan is
placed on nonaccrual status. In addition, loans past due 90 days or more as to
principal or interest are placed on nonaccrual status, except those loans which,
in management's judgment, are fully secured and in the process of collection.
Interest accrued but not received on loans placed on nonaccrual status is
reversed and charged against current operations. Interest subsequently received
on nonaccrual loans is either applied against principal or recorded as income
according to management's judgment as to the collectibility of principal.
Loans considered to be uncollectible are charged against the allowance
for possible loan losses. The allowance is increased by charges to current
operations in amounts sufficient to maintain the adequacy of the allowance. The
adequacy of the allowance is determined by management's evaluation of the extent
of existing risks in the loan portfolio and prevailing economic conditions.
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
(In Thousands)
Balance, beginning of period $ 7,122 $ 7,651
Provision for possible loan losses 50 300
Loans charged off (242) (599)
Recoveries of loans previously charged off 95 140
------ ------
Balance, end of period $ 7,025 $ 7,492
====== ======
</TABLE>
Information with respect to impaired loans consisted of the following
at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
(In Thousands)
Recorded investment in impaired loans $ 788 $ 1,556
==== =====
Impaired loans with specific loss allowances $ 788 $ 1,556
==== =====
Loss allowances reserved on impaired loans $ 118 $ 233
==== ====
</TABLE>
The Company's policy for interest income recognition on impaired loans
is to recognize income on impaired loans on the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Company; if these factors do not exist, the
Company will not recognize income. The average recorded investment in impaired
loans was $1,425,000 and $3,955,000 for the three months ended March 31, 1999
and 1998, respectively. During the three months ended March 31, 1999 and 1998,
the Company recognized no income on impaired loans.
Note 5. Interest Bearing Deposits
Interest bearing deposits consist of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
(In Thousands)
NOW accounts $ 200,819 $ 203,068
Savings accounts 89,087 87,150
Money market deposit accounts 19,380 19,659
Time certificates 261,754 266,901
------- -------
$ 571,040 $ 576,778
======= =======
</TABLE>
Note 6. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
(In Thousands)
Cash paid for interest $ 6,915 $ 6,774
Income taxes paid 100 150
Non-cash investing activities:
Real estate acquired in settlement of loans 541 0
</TABLE>
Granite State Bankshares, Inc. and Subsidiary
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
March 31, 1999
General
All information within this section should be read in conjunction with
the consolidated financial statements and notes included elsewhere in this Form
10-Q. All references in the discussion to financial condition and results of
operations are to the consolidated financial position of the Company and its
subsidiary taken as a whole.
The principal business of the Company is to serve as a financial
intermediary attracting deposits from the general public and making both secured
and unsecured loans. The operating results of the Company depend primarily on
net interest and dividend income earned by the Company's subsidiary, Granite
Bank ("the subsidiary bank"). Net interest and dividend income is the difference
between interest and dividend income on interest earning assets, primarily loans
and securities, and interest expense on interest bearing liabilities, which
consist of deposits and borrowings. Operating results of the Company also depend
upon the provision for possible loan losses, noninterest income, noninterest
expense and income taxes.
The Company has made, and may continue to make, various forward-looking
statements with respect to its financial condition and results of operations.
The Company cautions that these forward-looking statements which are based on
various assumptions (some of which are beyond the Company's control) are subject
to numerous risks and uncertainties and statements for periods subsequent to
March 31, 1999 are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from those set forth in forward-looking statements due
to a variety of factors, including, but not limited to, those related to the
economic environment, particularly in the market areas in which the Company
operates, competitive products and pricing, the ability of the Company and its
competitors, vendors and customers to respond effectively to issues related to
the Year 2000, fiscal and monetary policies of the U.S. Government, changes in
government regulations affecting financial institutions, including regulatory
fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset-liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity. The Company does
not undertake, and specifically disclaims any obligation, to publicly release
the result of any revisions which may be made to any forward-looking statements
to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
Financial Condition
Total assets decreased by $25,399,000 or 2.9%, from $878,147,000 at
December 31, 1998 to $852,748,000 at March 31, 1999. The change in assets
related primarily to decreases in cash and due from banks, interest bearing
deposits in other banks, securities held to maturity and securities available
for sale. The decreases in these assets were primarily used to fund deposit
outflows and decreases in securities sold under agreements to repurchase.
Cash and due from banks decreased $6,057,000, from $23,506,000 at
December 31, 1998 to $17,449,000 at March 31, 1999. Additionally, interest
bearing deposits with other banks, which primarily consist of deposits with the
Federal Home Loan Bank of Boston, decreased $2,670,000, from $19,532,000 at
December 31, 1998 to $16,862,000 at March 31, 1999. Interest bearing deposits
with other banks 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. Proceeds from the decreases in interest bearing deposits with
other banks and cash and due from banks were primarily used to fund deposit
outflows, decreases in securities sold under agreements to repurchase and
increases in the loan portfolio.
Securities held to maturity decreased $4,255,000, from $22,277,000 at
December 31, 1998 to $18,022,000 at March 31, 1999. Securities available for
sale decreased $13,070,000, from $219,765,000 at December 31, 1998 to
$206,695,000 at March 31, 1999. Proceeds from decreases in securities held to
maturity and securities available for sale were primarily used to fund deposit
outflows and decreases in securities sold under agreements to repurchase.
Net loans were $547,936,000 at March 31, 1999, an increase of $865,000
from $547,071,000 at December 31, 1998. Residential real estate loans increased
$8,263,000 to $336,506,000 or 60.47% of total loans outstanding at
March 31, 1999 from $328,243,000 or 59.07% of total loans outstanding at
December 31,1998. The increase in residential real estate loans was partially
offset by decreases in commercial, financial and agricultural loans and
commercial real estate loans of $5,458,000 and $2,122,000, respectively. The
increase in residential real estate loans is a result of the continued low
interest rate environment which encouraged borrowers to make new home purchases
or refinance their loans. The decrease in commercial, financial and agricultural
loans and commercial real estate loans related primarily to the pace of loan
repayments as a result of the continued low interest rate environment prevalent
during 1998 and 1999 and the highly competitive environment for attracting loans
amongst financial institutions in the Company's market areas.
Total deposits decreased $8,852,000, from $650,487,000 at
December 31, 1998 to $641,635,000 at March 31, 1999. The significant changes in
deposits related to a decrease in time certificates, NOW accounts and demand
deposits of $5,147,000, $2,249,000 and $3,114,000, respectively, partially
offset by an increase in savings accounts of $1,937,000. The decrease in the
time certificates related primarily to depositors looking to achieve higher
yields by investing their funds in alternate investment products. The changes
in the balances of demand deposits, NOW accounts and savings accounts related
primarily to the timing of the cash needs of depositors.
Securities sold under agreements to repurchase decreased $16,165,000,
from $70,905,000 at December 31, 1998 to $54,740,000 at March 31, 1999. Such
accounts usually reach a peak in June and December as municipalities invest the
real estate taxes they collect and decrease after those periods as the
municipalities use their invested cash.
Results of Operations
Net Earnings
Net earnings for the three months ended March 31, 1999 were $2,270,000,
compared to $2,507,000 for the three months ended March 31, 1998. Basic earnings
per share were $.39 for the three months ended March 31, 1999, compared to $.44
for the three months ended March 31, 1998. Diluted earnings per share were $.38
for the three months ended March 31, 1999 compared to $.42 for the three months
ended March 31, 1998. Included in net earnings were gains on sales of securities
available for sale of $5,000 and $1,099,000, respectively, for the three months
ended March 31, 1999 and 1998. Earnings before income taxes, excluding gains on
sales of securities available for sale, were $3,521,000 for the three months
ended March 31, 1999 compared to $2,750,000 for the three months ended
March 31, 1998, representing an increase of 28.04%. Net earnings after income
taxes, exclusive of the after tax effect of gains on sales of securities
available for sale were $2,267,000 for the three months ended March 31, 1999
compared to $1,832,000 for the three months ended March 31, 1998, representing
an increase of 23.74%.
Interest and Dividend Income
Interest and dividend income for the three months ended March 31, 1999
increased by $423,000 to $14,870,000 compared to $14,447,000 for the
corresponding period in 1998. The increase in interest and dividend income for
the three months ended March 31, 1999 compared to the three months ended
March 31, 1998 is primarily attributable to an increase in the average balance
of interest earning assets of $93,624,000 to $807,845,000 for the three months
ended March 31, 1999 compared to $714,221,000 for the three months ended
March 31, 1998, partially offset by a decrease in overall yield on interest
earning assets to 7.47% for the three months ended March 31, 1999 from 8.20% for
the three months ended March 31, 1998 due to the lower interest rate environment
for 1999 as compared to 1998. The decrease in overall yield on interest earning
assets resulted from a decrease in the yield on loans to 8.22% for the three
months ended March 31, 1999 compared to 8.91% for the three months ended
March 31, 1998 and a decrease in the yield on securities and interest earning
investments to 5.78% for the three months ended March 31, 1999 compared to 6.40%
for the three months ended March 31, 1998. The decrease in loan yield is due to
a shift in the mix of loans from commercial real estate and commercial and
industrial loans which comprised 33.59% and 41.51% of the loan portfolio at
March 31, 1999 and March 31, 1998, respectively, to lower yielding residential
real estate loans which comprised 60.47% and 51.20% of the loan portfolio at
March 31, 1999 and March 31, 1998, respectively. The decrease in the yield on
securities and interest earning assets was primarily the result of the continued
low interest rate environment that was prevalent throughout 1998 and the first
quarter of 1999, which caused proceeds from securities which matured or were
called, to be reinvested at lower rates.
Interest Expense
Interest expense for the three months ended March 31, 1999 increased by
$276,000 to $6,962,000 compared to $6,686,000 for the corresponding period in
1998. The increase in interest expense for the three months ended March 31, 1999
compared to the same period in 1998 is primarily due to an increase in the
average balance of total interest bearing liabilities of $69,181,000, to
$713,673,000 for the three months ended March 31, 1999 compared to $644,492,000
for the three months ended March 31, 1998, partially offset by a decrease in the
cost of those liabilities to 3.96% for the three months ended March 31, 1999
compared to 4.21% for the three months ended March 31, 1998. Average balances of
savings deposits increased $13,489,000 while average time deposits decreased
$15,084,000 for the three months ended March 31, 1999 compared to the same
period in 1998. The average cost of savings deposits and time deposits decreased
to 2.37% and 5.36%, respectively, for the three months ended March 31, 1999
compared to 2.65% and 5.63%, respectively, for the three months ended
March 31, 1998. The average balance of other borrowed funds increased
$70,776,000 for the three months ended March 31, 1999 compared to the same
period in 1998, partially offset by a decrease in the cost of these borrowings
to 4.69% for the three months ended March 31, 1999 compared to 4.90% for the
same period in 1998.
Net Interest and Dividend Income
Net interest and dividend income increased by $147,000 for the three
months ended March 31, 1999 compared to the same period in 1998. The increase
for the three months ended March 31, 1999 compared to the same period in 1998 is
primarily due to an increase in net interest earning assets of $24,443,000,
partially offset by a decrease in net interest rate spread from 3.99% for the
three months ended March 31, 1998 to 3.51% for the three months ended
March 31, 1999. The net yield on interest earning assets decreased from 4.41%
for the three months ended March 31, 1998 to 3.97% for the three months ended
March 31, 1999.
Provision for Possible Loan Losses
The provision for possible loan losses for the three months ended
March 31, 1999 was $50,000, compared to $300,000 for the three months ended
March 31, 1998. The decrease for the three months ended March 31, 1999, compared
to the same period in 1998, is related to a change in the mix of loans to
residential real estate loans, which accounted for 60.47% of the total loan
portfolio at March 31, 1999 compared to 51.20% at March 31, 1998, while
commercial real estate and commercial and industrial loans accounted for 33.59%
of the total loan portfolio in 1999 compared to 41.51% in 1998. Also
contributing to the decrease in the provision was a decrease of $3,346,000 in
nonperforming loans to $1,489,000 at March 31, 1999 compared to $4,835,000 at
March 31, 1998. The level of net charge-offs for the three months ended
March 31, 1999 was $147,000, compared to $459,000, for the corresponding period
a year ago.
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. The methodology for determining the amount of
the allowance for possible loan losses consists of several elements.
Nonperforming, impaired and delinquent loans are reviewed individually and the
value of any underlying collateral is considered in determining estimates of
possible losses associated with those loans. Another element involves estimating
losses inherent in categories of loans, based primarily on historical
experience, industry trends and trends in the real estate market and the current
economic environment in the Company's primary market areas. The last element is
based on management's evaluation of various conditions, and involves a higher
degree of uncertainty because they are not identified with specific problem
credits or portfolio segments. The conditions evaluated in connection with this
element include the following: industry and regional conditions; seasoning of
the loan portfolio and changes in the composition of and growth in the loan
portfolio; the strength and duration of the current business cycle; existing
general economic and business conditions in the lending areas; credit quality
trends; historical loan charge-off experience; and the results of bank
regulatory examinations.
Noninterest Income
Noninterest income for the three months ended March 31, 1999 totaled
$1,114,000, compared to $2,247,000 for the same period in 1998. The decrease of
$1,133,000 relates primarily to a decrease in net gains on sales of securities
available for sale of $1,094,000.
Noninterest Expense
Noninterest expense for the three months ended March 31, 1999 decreased
$413,000, or 7.05% to $5,446,000 as compared to $5,859,000 for the same period a
year earlier. The decrease for the three months ended March 31, 1999, compared
to the same period in 1998 relates primarily to a decrease of $379,000 in other
noninterest expenses. In general, the decrease in other noninterest expenses for
the three months ended March 31, 1999 compared to the same period in 1998,
related to additional efficiencies realized from the merger with Primary Bank,
which was completed after the close of business on October 31, 1997.
Income Taxes
Income tax expense for the three months ended March 31, 1999 was
$1,256,000, compared with $1,342,000 for the same period in 1998. Income tax
expense as a percentage of earnings before income taxes was 35.62% for the three
months ended March 31, 1999 and 34.87% for the three months ended
March 31, 1998.
Risk Elements
Total nonperforming loans decreased from $3,013,000 or 0.54% of total
loans, at December 31, 1998, to $1,489,000 or 0.27% of total loans, at
March 31, 1999. During the same period, other real estate owned, increased from
$1,601,000 to $1,780,000. The allowance for possible loan losses as a percent of
total nonperforming loans was 471.79% at March 31, 1999, compared with 236.38%
at December 31, 1998.
As shown in the following table, nonperforming assets as a percentage of
total assets were 0.38% and 0.53%, as of March 31, 1999 and December 31, 1998,
respectively.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
($ in Thousands)
Loans 90 days or more past due
and still accruing $ 27 $ 146
===== ====
Nonaccrual/nonperforming loans $ 1,489 $ 3,013
Other real estate owned 1,780 1,601
----- -----
Total nonperforming assets $ 3,269 $ 4,614
===== =====
Allowance for possible loan losses $ 7,025 $ 7,122
Nonperforming loans as a percent of
total loans 0.27% 0.54%
Allowance for possible loan losses
as a percent of total nonperforming loans 471.79% 236.38%
Nonperforming assets as a percent of total
assets 0.38% 0.53%
</TABLE>
Liquidity
The Company's primary sources of liquidity, through its subsidiary bank,
are its borrowing capacity with the Federal Home Loan Bank of Boston, interest
bearing deposits with other banks and securities available for sale,
particularly short-term investments. At March 31, 1999, short-term and long-term
borrowings from the Federal Home Loan Bank of Boston were $80,597,000, with an
additional available borrowing capacity of approximately $248,469,000; interest
bearing deposits with other banks were $16,862,000 and securities available for
sale were $206,695,000. Included in securities held to maturity and securities
available for sale are debt securities with a carrying value of $203,382,000.
The weighted average maturity for debt securities held to maturity and available
for sale, excluding mortgage-backed securities with a carrying value of
$10,027,000, is approximately 48 months. In addition to these liquidity sources,
the Company has significant cash flow from the amortization of loans through its
subsidiary bank.
Capital Resources
Under the Federal Reserve Board's guidelines, bank holding companies
such as the Company currently are required to maintain a minimum ratio of
qualifying total capital to total assets and off-balance sheet instruments, as
adjusted to reflect their relative credit risks, of 8.0 percent. At least
one-half of total capital must be comprised of common equity, retained earnings,
non-cumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill ("Tier I capital").
The Federal Reserve Board also has established an additional capital
adequacy guideline referred to as the Tier I leverage capital ratio, which
measures the ratio of Tier I capital to total assets less goodwill. Although the
most highly-rated bank holding companies will be required to maintain a minimum
Tier I leverage capital ratio of 3.0 percent, most bank holding companies will
be required to maintain Tier I leverage capital ratios of 4.0 percent to 5.0
percent or more. The actual required ratio will be based on the Federal Reserve
Board's assessment of the individual bank holding company's asset quality,
earnings performance, interest rate risk, and liquidity. The Company was in
compliance with all regulatory capital requirements at March 31, 1999 and
December 31, 1998.
Substantially similar rules have been issued by the FDIC with respect to
state-chartered banks which are not members of the Federal Reserve System such
as the subsidiary bank. At March 31, 1999 and December 31, 1998, the subsidiary
bank was in compliance with all regulatory capital requirements. Additionally,
at March 31, 1999, the subsidiary bank was considered "well capitalized" for
purposes of the FDIC's prompt corrective action regulations.
At March 31, 1999 the Company's and the subsidiary bank's regulatory
capital ratios as a percentage of assets are as follows:
<TABLE>
<CAPTION>
March 31, 1999
----------------------
Subsidiary
Bank Company
---------- ---------
<S> <C> <C>
Tier I leverage capital 7.94% 8.22%
Tier I capital to risk-weighted assets 13.04% 13.49%
Total capital to risk-weighted assets 14.29% 14.74%
</TABLE>
Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems and non-computer related embedded technology 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 has developed a Year 2000 Policy Statement which was
approved by the Company's Board of Directors and is utilizing both internal and
external resources to identify, correct and test the systems for Year 2000
compliance. The Year 2000 Policy Statement contains a phases approach which
includes the following phases: awareness, inventory, assessment, renovation,
validation, implementation and post implementation. As of March 31, 1999, the
Company has substantially completed the assessment, renovation, validation and
implementation phases and is actively working on the Year 2000 remediation and
business resumption contingency plans. The Company has substantially completed
any necessary corrections, vendor reprogramming and testing efforts which will
allow adequate time for any potential modifications in 1999. The Company is
currently in the post-implementation phase, which will utilize and test the
contingency plans to enhance back-up steps and procedures to prepare for worst
case scenarios. The Company's contingency plans are expected to be completed
during the second quarter of 1999. To date, the Company has received a warranty
of compliance from its processing vendor for loans, deposits and related
products. Additionally, letters have been received from the Company's remaining
vendors that plans are being developed to address the Year 2000 issue. All of
these efforts are being coordinated through a Year 2000 committee which is
chaired by the Company's Chief Operations Officer and includes a representative
from the subsidiary bank's Board of Directors. The Chief Operations Officer
reports periodically to the Company's and the subsidiary bank's Board of
Directors with respect to the Year 2000 committee's efforts. Management's
estimate of the additional costs related to the Year 2000 compliance are
approximately $250,000 to $300,000, of which approximately $31,000 and $101,000
has been incurred for the three months ended March 31, 1999 and the year ended
December 31, 1998, respectively. The remaining Year 2000 costs are expected to
be incurred throughout 1999.
The Company reviewed its loan relationships over $250,000 and assessed a
Year 2000 compliance risk for each customer. The risk assessment consisted of a
detailed questionnaire relating to the customer's Year 2000 efforts and resulted
in the assignment of risk levels of low, medium and high risk for noncompliance
with the Year 2000. The review of borrowers included the respective borrower's
customer base and the likelihood of their noncompliance. In the first quarter of
1999, the Company reviewed all medium risk borrowing relationships and as a
result of this review and the completed review of loan relationships over
$250,000, it was determined that there was no specific risk or significant loss
exposure that could be identified at this time resulting from the Year 2000. The
Company has also incorporated this review into the approval process for all new
borrowing relationships. In addition to the analyses of the loan relationships,
the Company's subsidiary bank has also identified deposit customers and
customers from whom the Company borrows short-term funds in the form of
securities sold under agreements to repurchase with balances greater than
$250,000 and identified large community employers in communities where branches
are located in order to determine an estimate of additional liquidity that may
be needed as a result of the Year 2000 project. Although no assurances can be
given, based on the Company's review of significant deposit and borrowing
relationships through March 31, 1999, management believes these relationships
will not have a material adverse affect on the Company's liquidity, financial
condition or results of operations.
The most significant risk anticipated by the Company is the possibility
of interruption to its customer account processing systems. Due to the progress
described above, the Company does not presently foresee any interruptions to
these systems, but cannot predict consequences of interruptions to these systems
from outside factors, such as the loss of telecommunication and electrical power
(worst case scenario). The Company's business resumption contingency plan will
address resumption of business should the Company lose its telecommunications or
electrical power.
Consolidated Quarterly Average Balances and Interest Rates
The table on the following page presents, for the periods indicated,
average balances of assets and liabilities, as well as yields on interest
earning assets and the cost of interest bearing liabilities.
<TABLE>
<CAPTION>
Granite State Bankshares, Inc. and Subsidiary
Consolidated Quarterly Average Balances and Interest Rates
($ in Thousands)
1999 QTD 1998 QTD
---------------- --------------------------------------------------------
First Quarter Fourth Quarter Third Quarter Second Quarter
Avg. Bal. Rate Avg. Bal. Rate Avg. Bal. Rate Avg. Bal. Rate
--------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $ 557,245 8.22% $ 550,627 8.25% $ 542,139 8.43% $ 539,783 8.62%
Securities and
interest earning
investments 250,600 5.78% 250,425 5.72% 224,431 5.88% 182,375 5.91%
------- ------- ------- -------
Total interest
earning assets 807,845 7.47% 801,052 7.46% 766,570 7.68% 722,158 7.93%
Noninterest earning
assets 56,931 60,832 65,235 77,019
Allowance for possible
loan losses (7,133) (7,565) (7,385) (7,532)
------- ------- ------- -------
Total Assets $ 857,643 $ 854,319 $ 824,420 $ 791,645
======= ======= ======= =======
Liabilities and
stockholders' equity:
Savings deposits $ 302,555 2.37% $ 302,579 2.47% $ 295,424 2.61% $ 299,353 2.63%
Time deposits 264,321 5.36% 267,443 5.49% 265,876 5.55% 258,483 5.54%
Other borrowed funds 146,797 4.69% 135,860 4.64% 117,382 5.06% 88,977 4.94%
------- ------- ------- -------
Total int. bearing
liabilities 713,673 3.96% 705,882 4.03% 678,682 4.18% 646,813 4.11%
Noninterest bearing
deposits 67,801 71,709 70,014 69,895
Other liabilities 2,998 3,248 3,130 3,108
Stockholders' equity 73,171 73,480 72,594 71,829
------- ------- ------- -------
Total liab. and
stockholders' equity $ 857,643 $ 854,319 $ 824,420 $ 791,645
======= ======= ======= =======
Interest rate spread 3.51% 3.43% 3.50% 3.82%
===== ===== ===== =====
Net average earning
balance / Net yield on
interest earning assets $ 94,172 3.97% $ 95,170 3.90% $ 87,888 3.98% $ 75,345 4.25%
====== ===== ====== ===== ====== ===== ====== =====
<CAPTION>
1998 QTD 1997 QTD
---------------- --------------------------------------------------------
First Quarter Fourth Quarter Third Quarter Second Quarter
Avg. Bal. Rate Avg. Bal. Rate Avg. Bal. Rate Avg. Bal. Rate
--------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $ 513,365 8.91% $ 499,316 8.93% $ 488,820 8.86% $ 464,524 8.95%
Securities and
interest earning
investments 200,856 6.40% 232,678 6.23% 250,838 6.30% 289,349 6.35%
------- ------- ------- -------
Total interest
earning assets 714,221 8.20% 731,994 8.07% 739,658 7.99% 753,873 7.95%
Noninterest earning
assets 79,945 77,425 73,898 71,612
Allowance for possible
loan losses (7,749) (7,248) (6,632) (6,205)
------- ------- ------- -------
Total Assets $ 786,417 $ 802,171 $ 806,924 $ 819,280
======= ======= ======= =======
Liabilities and
stockholders' equity:
Savings deposits $ 289,066 2.65% $ 288,095 2.60% $ 284,281 2.61% $ 284,767 2.63%
Time deposits 279,405 5.63% 290,428 5.67% 284,698 5.64% 282,420 5.58%
Other borrowed funds 76,021 4.90% 79,722 5.03% 102,852 5.21% 122,697 5.31%
------- ------- ------- -------
Total int. bearing
liabilities 644,492 4.21% 658,245 4.25% 671,831 4.29% 689,884 4.31%
Noninterest bearing
deposits 66,622 70,227 64,624 62,872
Other liabilities 5,787 7,095 5,133 4,382
Stockholders' equity 69,516 66,604 65,336 62,142
------- ------- ------- -------
Total liab. and
stockholders' equity $ 786,417 $ 802,171 $ 806,924 $ 819,280
======= ======= ======= =======
Interest rate spread 3.99% 3.82% 3.70% 3.64%
===== ===== ===== =====
Net average earning
balance / Net yield on
interest earning assets $ 69,729 4.41% $ 73,749 4.25% $ 67,827 4.09% $ 63,989 4.00%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Granite State Bankshares, Inc. and Subsidiary
Part I Item 3 and Part II - Other Information
March 31, 1999
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material changes in the Company's assessment of its
sensitivity to market risk since its presentation in the 1998 annual report
filed with the SEC.
Part II -Other Information
Item 1. Legal Proceedings
The Company is a defendant in ordinary and routine pending legal actions
incident to its business, none of which is believed by management to be material
to the financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
27 Financial Data Schedule
2. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRANITE STATE BANKSHARES, INC.
/s/ Charles W. Smith
________________________________________
Dated: May 11, 1999 By: Charles W. Smith
Chairman and
Chief Executive Officer
/s/ William G. Pike
________________________________________
Dated: May 11, 1999 By: William G. Pike
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,449
<INT-BEARING-DEPOSITS> 16,862
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 206,695<F1>
<INVESTMENTS-CARRYING> 18,022
<INVESTMENTS-MARKET> 17,958
<LOANS> 554,961<F2>
<ALLOWANCE> 7,025
<TOTAL-ASSETS> 852,748
<DEPOSITS> 641,635
<SHORT-TERM> 54,740<F3>
<LIABILITIES-OTHER> 3,538
<LONG-TERM> 80,597
0
0
<COMMON> 6,790
<OTHER-SE> 65,448
<TOTAL-LIABILITIES-AND-EQUITY> 852,748
<INTEREST-LOAN> 11,296
<INTEREST-INVEST> 3,365
<INTEREST-OTHER> 209
<INTEREST-TOTAL> 14,870
<INTEREST-DEPOSIT> 5,263
<INTEREST-EXPENSE> 6,962
<INTEREST-INCOME-NET> 7,908
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 5,446
<INCOME-PRETAX> 3,526
<INCOME-PRE-EXTRAORDINARY> 2,270
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,270
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
<YIELD-ACTUAL> 3.97
<LOANS-NON> 1,489
<LOANS-PAST> 27
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,122
<CHARGE-OFFS> 242
<RECOVERIES> 95
<ALLOWANCE-CLOSE> 7,025
<ALLOWANCE-DOMESTIC> 5,187
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,838
<FN>
<F1>Securities available for sale, at market value
<F2>Loans net of unearned income, gross of allowance for possible loan losses
and excluding loans held for sale
<F3>Securities sold under agreements to repurchase of $54,740
<F4>Includes other borrowings with the Federal Home Loan Bank of Boston of
$80,597
</FN>
</TABLE>
