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, 1998
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. ( )
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant, based on the closing bid price of
March 18, 1999, was $100,216,000. 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 18, 1999, the number of shares of the Registrant's common
stock outstanding of record (exclusive of treasury shares) was 5,870,481.
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, 1998 "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 1999 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"
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 5
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 12
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 22
I. Deposits 22
J. Maturities of Time Deposits 23
K. Return on Equity and Assets 23
L. Borrowings 23
M. Competition 25
N. Subsidiaries 25
d. Financial Information About Foreign and
Domestic Operations and Export Sales 25
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Additional Item. Executive Officers 27
PART II
Page
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 28
a. Market Information 28
b. Holders 28
c. Dividends 28
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 7a.Quantitative and Qualitative Disclosures About
Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
a. Financial Statements Required by Regulation S-X 29
b. Supplementary Financial Information 29
1. Selected Quarterly Financial Data 29
2. Information on the Effects of Changing Prices 29
3. Information About Oil and Gas Producing
Activities 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 29
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 30
a. List of Documents filed as Part of this Report 30
1. Financial Statements 30
2. Financial Statement Schedules 31
b. Reports on Form 8-K 31
c. Exhibits 31
Signatures 33
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.
Effective after the close of business October 31, 1997, the Company
completed its acquisition of Primary Bank by the merger of Primary Bank with and
into the Company's subsidiary, Granite Bank. See also Note 2 to the Consolidated
Financial Statements in the Annual Report to Stockholders for the year ended
December 31, 1998 which is incorporated herein by reference.
(b) Financial Information about Industry Segments
Not applicable.
(c) Narrative Description of Business
(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.
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.
Risk Management
- ---------------
In the normal course of business, the Company is subject to various
risks, the most significant of which are credit, liquidity and market risk,
which includes 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. The Board of Directors
establishes policies with respect to risk management, lending, investment,
asset/liability management and interest rate risk and reviews and approves these
policies annually. The Board of Directors delegates the responsibility for
carrying out these policies to management.
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, loan
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 to 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.
Market Risk
- -----------
Market risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. The risk of loss can be reflected
in diminished current values and/or reduced potential net interest income in
future periods. The Company's market risk arises primarily from interest rate
risk. The Company is also exposed to market price risk through its investments
in marketable equity securities. Market price risk related to investments in
marketable equity securities is the potential loss in estimated fair value
resulting from adverse changes in prices quoted by stock markets. The Company
manages this risk by closely monitoring market developments and reviewing
current financial statements and other reports published by the issuers of the
equity securities.
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 recalculates the estimated net present value of equity and net
interest and dividend income 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, 1998, 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").
The federal and state laws and regulations which are applicable to banks
regulate, among other things, the scope of their business, their investments,
the reserves required to be kept against deposits, the timing of the
availability of deposited funds and the nature and amount of collateral for
certain loans. The laws and regulations governing the Bank generally have been
promulgated to protect depositors and not for the purpose of protecting
stockholders. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the
Commissioner, the FRB, the FDIC or the United States Congress, could have a
material adverse impact on the Company, the Bank and their operations.
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, 1998 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 1998, these assessments totaled $13,852.
Federal Deposit Insurance Corporation
- -------------------------------------
Safety and Soundness Regulations
- --------------------------------
The federal regulatory agencies, including the FDIC, were required to
prescribe standards for depository institutions under their jurisdiction
relating to a variety of operating matters such as internal controls,
information systems and internal audit systems, loan documentation and credit
underwriting, interest rate risk exposure, asset growth and quality and employee
compensation. The federal banking agencies have adopted a final rule containing
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards required under the
Federal Deposit Insurance Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit systems; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the Federal Deposit Insurance Act. The final
rule establishes deadlines for the submission and review of such safety and
soundness compliance plans when such plans are required.
Investment Authority
- --------------------
The FDIC regulations restrict investments by and activities of insured
state banks such as the Bank. Effective December 19, 1992, neither state banks
nor their subsidiaries may engage in activities, as principal, not permissible
for national banks or their subsidiaries unless the FDIC determines that the
activity would pose no significant risk to the deposit insurance fund and the
bank is and continues to comply with applicable federal capital standards.
Additionally, subject to exceptions for majority-owned subsidiaries and certain
other limited exceptions, state banks may not acquire or retain any equity
investment of a type or in an amount not permissible for national banks. The
Federal Deposit Insurance Act does contain a partial exception from these
requirements for stock and mutual fund ownership by banks which were authorized
to make such investments by state law and had made such investments during a
specified time period. The Bank believed it qualified for the exception and
applied to the FDIC for approval. During 1993, the Bank received approval from
the FDIC to invest in equity securities listed on a national exchange and
registered shares of mutual funds, which are otherwise impermissible investments
for national banks, in an amount not to exceed 100 percent of its Tier 1
capital, which amounted to $66,369,000 at December 31, 1998.
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, 1998, the Bank's ratio of core capital to average
total assets equaled 7.82%, 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, 1998, the Bank met its risk based capital
requirements with a core risk-based capital to risk-weighted assets ratio of
12.60% and a total risk-based capital to risk-weighted assets ratio of 13.85%.
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, 1998, 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 Management's Discussion and Analysis Section of the
Annual Report to Stockholders for the year ended December 31, 1998.
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.
Community Reinvestment Act
- --------------------------
Under the Community Reinvestment Act, as amended ("CRA"), every FDIC-
insured institution has a continuing and affirmative obligation consistent with
safe and sound banking practices to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC to assess the Bank's record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by the Bank. An unsatifactory rating may be used as
the basis for the denial of an application by the FDIC. The Bank's latest CRA
rating, received from the FDIC was "satisfactory".
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 1998, the Bank paid annual insurance premiums of $93,000 compared
with $82,000 in 1997.
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 is expected to occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged.
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.
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 1998, these regulations required reserves of 3% of total transaction
accounts of up to $47.8 million. Total transaction accounts amounting to over
$47.8 million required a reserve of $1.4 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. Institutions were permitted to designate and
exempt $4.7 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, 1998. The Bank
also has the authority to borrow from the Federal Reserve Board "discount
window" to meet its short-term liquidity needs.
During December, 1998, the amount of reservable liabilities exempt from
reserve requirements was increased to $4.9 million and the level at which
reservable liabilities would be subject to the 10% rate was lowered to $46.5
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, 1998, Granite State had consolidated Tier I and
total risk-based capital ratios of 13.17% and 14.42%, respectively and a
leverage ratio of Tier I capital to average total assets of 8.18%.
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 end of the year; a percentage of its outstanding
advances from the FHLB of Boston; or 1% of 30% of total assets. As of December
31, 1998, 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 $4,031,000.
(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, 1998, Granite State and its subsidiary employed 309
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, 1998, on page 21 of the Annual
Report to Stockholders for the year ended December 31, 1998 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, 1998, on page 22 of the
Annual Report to Stockholders for the year ended December 31, 1998 are
incorporated herein by reference.
(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 in accumulated other
comprehensive income 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, 1998, 1997 and 1996. 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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(In Thousands)
Securities held to maturity
At December 31, 1998
US Government agency obligations $ 17,265 $ 230 $ 17,495
Other corporate obligations 5,012 41 5,053
------ ------ ------ ------
Total securities held to maturity $ 22,277 $ 271 $ 0 $ 22,548
====== ====== ====== ======
Securities available for sale
At December 31, 1998
US Treasury obligations $ 82,521 $ 1,195 $ 83,716
US Government agency obligations 55,961 112 $ 75 55,998
Other corporate obligations 46,593 150 286 46,457
Mortgage-backed securities:
FNMA 7,045 35 49 7,031
FHLMC 2,876 2 25 2,853
GNMA 1,190 59 3 1,246
SBA 552 16 568
------ ------ ------ ------
Total mortgage-backed securities 11,663 112 77 11,698
Mutual Funds 6,326 105 29 6,402
Marketable equity securities 14,122 2,785 1,413 15,494
------- ------ ------ -------
Total securities available for sale $ 217,186 $ 4,459 $ 1,880 $ 219,765
======= ====== ====== =======
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>
As a member of the Federal Home Loan Bank (FHLB) of Boston, the Bank is
required to invest in $100 par value stock of the FHLB of Boston in the amount
of 1% of its outstanding loans secured by residential housing, or 1% of 30% of
total assets, or a percentage 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, 1998, 1997 and 1996, the Company had investments in FHLB of Boston
stock of $7,201,000, $7,201,000, and $6,365,000 respectively. At
December 31, 1998 the weighted average yield on FHLB of Boston stock was 6.40%.
The following table sets forth the maturity distribution of securities
held to maturity and securities available for sale at December 31, 1998 and the
weighted average yields of such securities (calculated on the basis of the
amortized cost and effective yields weighted for the scheduled maturity of each
security).
<TABLE>
<CAPTION>
Amortized Weighted
Cost Average Yield
--------- -------------
<S> <C> <C>
(In Thousands)
US Treasury obligations
Due within 1 year $ 49,980 5.83%
Due after 1 but within 5 years 32,541 6.13%
-------
Total 82,521 5.95%
-------
US Government Agency obligations
Due within 1 year - -
Due after 1 but within 5 years 54,961 5.93%
Due after 5 but within 10 years 18,265 6.59%
-------
Total 73,226 6.09%
-------
Other corporate obligations
Due within 1 year - -
Due after 1 but within 5 years 28,087 5.73%
Due after 5 but within 10 years 18,147 5.78%
Due after 10 years 5,371 7.26%
-------
Total 51,605 5.91%
-------
Mortgage-backed securities
Due within 1 year 16 9.00%
Due after 1 but within 5 years 143 7.74%
Due after 5 but within 10 years 1,179 6.59%
Due after 10 years 10,325 5.98%
-------
Total 11,663 6.07%
-------
Total debt securities 219,015 5.99%
Mutual fund shares* 6,326 5.28%
Marketable equity securities* 14,122 2.71%
Net unrealized gains on
securities available for sale 2,579 -
-------
Total securities held to maturity
and securities available for sale $ 242,042 5.78%
=======
</TABLE>
Included in total debt securities above are U.S. Government Agency and
other corporate obligations classified as securities held to maturity, with an
amortized cost of $22,277,000, all of which are due after five years, but within
ten years with a weighted average yield of 6.52%. 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, 1998. The Company owned $10,000,000 par value of Household Finance
Corporation floating rate notes due June 17, 2005 with an amortized cost of
$9,984,000 and a book value and estimated market value of $9,838,000.
(D) Loan Portfolio
The following table shows Granite State's loan distribution as of
December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Commercial, financial and agricultural $ 48,418 $ 68,513 $ 63,543 $ 72,657 $ 59,505
Real estate-residential 328,243 245,577 200,983 189,513 196,670
Real estate-commercial 146,093 151,474 139,400 124,319 106,835
Real estate-construction and land development 2,281 6,000 5,355 3,318 6,768
Installment 7,809 11,588 12,076 12,195 14,741
Other 22,855 26,013 20,940 24,484 26,233
------- ------- ------- ------- -------
Total Loans 555,699 509,165 442,297 426,486 410,752
Less:
Allowance for possible loan losses (7,122) (7,651) (6,253) (7,151) (7,080)
Unearned income (1,506) (1,432) (1,860) (2,356) (2,930)
------- ------- ------- ------- -------
Net Loans $ 547,071 $ 500,082 $ 434,184 $ 416,979 $ 400,742
======= ======= ======= ======= =======
</TABLE>
(E) Maturity of Loans
The following table shows the maturity distribution of loans
outstanding, excluding non-accrual loans of $3,013,000 as of December 31, 1998.
<TABLE>
<CAPTION>
One Year Over One Year Over
or Less to Five Years Five Years Total
-------- ------------- ---------- -------
<S> <C> <C> <C> <C>
(In Thousands)
Commercial, financial and agricultural $ 12,904 $ 16,855 $ 17,981 $ 47,740
Real estate-residential 4,603 9,128 313,165 326,896
Real estate-commercial 11,046 26,114 108,341 145,501
Real estate-construction and land development 1,602 301 1,903
Installment 1,723 5,573 495 7,791
Other 2,078 1,439 19,338 22,855
------- ------- ------- -------
$ 33,956 $ 59,410 $ 459,320 $ 552,686
======= ======= ======= =======
Loans maturing after one year:
Fixed interest rate $ 28,511 $ 152,076 $ 180,587
Variable interest rate 30,899 307,244 338,143
------- ------- -------
$ 59,410 $ 459,320 $ 518,730
======= ======= =======
</TABLE>
Included in the loan maturity table above, are loans with a variable
interest rate totaling $30,899,000 which are scheduled to mature in one to five
years, of which $25,834,000 are scheduled to reprice within one year or less,
with the remaining $5,065,000 scheduled to reprice within one to five years.
Also included in the loan maturity table, are loans with a variable interest
rate totaling $307,244,000 which are scheduled to mature after five years, of
which $158,548,000 are scheduled to reprice within one year or less; $91,543,000
which are scheduled to reprice within one to five years, with the remaining
$57,153,000 scheduled to reprice after five years.
(F) Nonperforming Loans and Assets
The following table summarizes Granite State's nonperforming loans and
assets at December 31. Amounts shown reflect principal only.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
($ In Thousands)
Nonperforming Loans:
Commercial, financial and agricultural $ 678 $ 956 $ 204 $ 670 $ 733
Real estate-residential 1,347 1,489 2,707 4,231 2,648
Real estate-commercial 592 4,261 1,032 2,106 2,656
Real estate-construction and land development 378 92 102 444 298
Installment and other 18 347 41 256 292
------ ------ ------ ------ ------
Total nonperforming loans 3,013 7,145 4,086 7,707 6,627
Other real estate owned 1,601 1,905 3,492 4,779 7,464
------ ------ ------ ------ ------
Total nonperforming loans and other
real estate owned $ 4,614 $ 9,050 $ 7,578 $12,486 $14,091
====== ====== ====== ====== ======
Percentage of nonperforming loans and
other real estate owned to total loans
receivable 0.83% 1.78% 1.71% 2.93% 3.43%
===== ===== ===== ===== =====
Percentage of nonperforming loans and
other real estate owned to total assets 0.53% 1.11% 0.95% 1.71% 2.11%
===== ===== ===== ===== =====
Loans delinquent 90 days or more still
accruing, not included in above $ 146 $ 535 $ 93 $ 0 $ 21
===== ===== ===== ===== =====
</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, 1998, 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 $441,000. The amount of
interest income on those loans included in net earnings for the year ended
December 31, 1998 amounted to $145,000.
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 $1,556,000 and $4,559,000, respectively, at December 31, 1998 and 1997. The
average recorded investment in impaired loans was $3,502,000, $3,001,000 and
$3,933,000, respectively, in 1998, 1997 and 1996. No income was recognized on
impaired loans during 1998 and 1997 and $4,000 of income was recognized during
1996. Total cash collected on impaired loans during 1998, 1997 and 1996 was
$710,000, $779,000 and $2,427,000, respectively, of which $710,000, $779,000 and
$2,423,000, respectively, was credited to the principal balance outstanding on
such loans.
Changes in the allowance for possible loan losses allocated to impaired
loans, which is included in the allowance for possible loan losses are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
(In Thousands)
Balance at beginning of year $ 1,054 $ 457 $ 1,114
Provision for possible loan losses 201 983 499
Loans charged off (1,022) (386) (1,156)
------ ------ ------
Balance at end of year $ 233 $ 1,054 $ 457
====== ====== ======
</TABLE>
At December 31, 1998, 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 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>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Condominiums and apartment projects $ 131 $ 371 $ 780 $ 1,124 $ 1,797
Single family housing projects 739 792 1,281 1,367 2,107
Retail and office 83 1,272 1,477
Non-retail commercial 756 773 798 1,996 1,482
Residential 451 437 1,078 625 1,192
----- ----- ----- ----- -----
2,077 2,373 4,020 6,384 8,055
Less: Valuation allowance 476 468 528 1,605 591
----- ----- ----- ----- -----
$ 1,601 $ 1,905 $ 3,492 $ 4,779 $ 7,464
===== ===== ===== ===== =====
</TABLE>
As of December 31, 1998, there were no loan concentrations exceeding
10% of total loans.
As of December 31, 1998, neither Granite State nor its subsidiary,
Granite Bank, had any foreign loans.
(G) Summary of Loan Loss Experience and Allocation
of the Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained through provisions
for possible loan losses based upon management's ongoing evaluation of the risks
inherent in the loan portfolio. 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, including trends in nonperforming loans expected to result from changes
in existing conditions; historical loan charge-off experience; and the results
of bank regulatory examinations. At December 31, 1996, the level of the
allowance was lower than the level of the allowance at December 31, 1995 and
December 31, 1994 due primarily to a reduction in the level of nonperforming
loans. At December 31, 1997, the level of the allowance was higher than the
level of the allowance at December 31, 1996 due primarily to increases in
nonperforming and impaired loans, and an increase in the total loan portfolio,
including growth in commercial business loans and commercial real estate loans.
At December 31, 1998, the level of the allowance was lower than the 1997 level,
due to reductions in the level of nonperforming and impaired loans in 1998
compared with 1997, increased net charge-offs for 1998 compared with 1997, as
well as a change in the mix of loans to primarily residential real estate loans
which accounted for 59.1% of total loan portfolio at December 31, 1998 compared
to 48.2% at December 31, 1997, while commercial real estate and commercial and
industrial loans accounted for 35.0% of the total loan portfolio in 1998
compared to 43.2% in 1997. While management believes that the allowance for
possible loan losses at December 31, 1998 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>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Balance at beginning of year $ 7,651 $ 6,253 $ 7,151 $ 7,080 $ 6,950
Provision for possible loan losses 1,125 2,425 1,372 3,337 1,032
Loans charged off (2,113) (1,205) (3,020) (3,573) (1,346)
Recoveries of loans previously charged off 459 178 750 307 444
------ ------ ------ ------ ------
Balance at end of year $ 7,122 $ 7,651 $ 6,253 $ 7,151 $ 7,080
====== ====== ====== ====== ======
</TABLE>
A summary of loan charge-offs by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Commercial, financial
and agricultural $ 503 $ 356 $ 684 $ 1,085 $ 362
Real estate-residential 298 613 918 606 303
Real estate-commercial 903 150 907 1,736 409
Real estate-construction
and land development 15 19 78 0 0
Installment and other loans 394 67 433 146 272
------ ------ ------ ------ ------
$ 2,113 $ 1,205 $ 3,020 $ 3,573 $ 1,346
====== ====== ====== ====== ======
</TABLE>
A summary of loan recoveries by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Commercial, financial
and agricultural $ 82 $ 35 $ 460 $ 67 $ 163
Real estate-residential 199 64 60 110 62
Real estate-commercial 78 56 105 76 201
Real estate-construction
and land development 1 1 57 38 0
Installment and other loans 99 22 68 16 18
----- ----- ----- ----- -----
$ 459 $ 178 $ 750 $ 307 $ 444
===== ===== ===== ===== =====
</TABLE>
The ratio of net loan charge-offs to average loans outstanding for the
year ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
($ In Thousands)
Net loan charge-offs $ 1,654 $ 1,027 $ 2,270 $ 3,266 $ 902
====== ====== ====== ====== ======
Average loans outstanding $536,596 $474,844 $423,421 $419,533 $411,165
======= ======= ======= ======= =======
Ratio of net loan charge-offs
to average loans outstanding 0.31% 0.22% 0.54% 0.78% 0.22%
====== ====== ====== ====== ======
</TABLE>
An allocation of the allowance for possible loan losses as of
December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ------------------------- -------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
------ ----------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
($ In Thousands)
Commercial, financial
and agricultural $ 1,245 8.71% $ 1,507 13.46% $ 1,291 14.37%
Real estate-residential 1,182 59.07% 973 48.23% 968 45.44%
Real estate-commercial 2,567 26.29% 3,229 29.75% 2,415 31.52%
Real estate-construction
and land development 278 0.41% 125 1.18% 120 1.21%
Installment and other loans 542 5.52% 690 7.38% 580 7.46%
Unallocated 1,308 - 1,127 - 879 -
----- ------- ----- ------- ----- -------
$ 7,122 100.00% $ 7,651 100.00% $ 6,253 100.00%
===== ======= ===== ======= ===== =======
<CAPTION>
1995 1994
-------------------------- -------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
------ ----------------- ------ ----------------
<S> <C> <C> <C> <C>
($ In Thousands)
Commercial, financial
and agricultural $ 1,401 17.04% $ 1,931 14.49%
Real estate-residential 1,204 44.43% 924 47.88%
Real estate-commercial 2,493 29.15% 2,331 26.01%
Real estate-construction
and land development 131 0.78% 178 1.65%
Installment and other loans 600 8.60% 591 9.97%
Unallocated 1,322 - 1,125 -
------ ------- ------ -------
$ 7,151 100.00% $ 7,080 100.00%
====== ======= ====== =======
</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>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Allowance for possible
loan losses as a percentage
of total loans outstanding 1.28% 1.50% 1.41% 1.68% 1.72%
====== ====== ====== ====== ======
</TABLE>
(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>
1998 1997 1996
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
($ In Thousands)
Interest bearing deposits:
Interest bearing NOW deposits $ 183,692 2.59% $ 158,374 2.64% $ 141,311 2.63%
Money market deposits 24,474 2.75% 34,628 2.67% 40,232 2.72%
Savings deposits 88,473 2.55% 90,510 2.57% 92,593 2.58%
Time deposits 267,764 5.55% 283,514 5.61% 262,165 5.64%
------- ------- -------
Total interest bearing deposits $ 564,403 4.00% $ 567,026 4.11% $ 536,301 4.10%
======= ======= =======
Noninterest bearing deposits $ 69,575 N/A $ 63,870 N/A $ 58,935 N/A
======= ======= =======
</TABLE>
(J) Maturities of Time Deposits
The maturity distribution of time certificates of deposit of $100,000 or
more at December 31, 1998 follows:
<TABLE>
<CAPTION>
REMAINING MATURITY BALANCE
- ------------------ -------
<S> <C>
(In Thousands)
3 months or less $ 6,161
Over 3 through 6 months 7,136
Over 6 through 12 months 15,566
Over 12 through 36 months 3,796
Over 36 months 886
-------
$ 33,545
=======
</TABLE>
(K) Return on Equity and Assets
Operating and capital ratios for the year ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net earnings to average assets 1.17% 0.29% 0.95%
Net earnings to average
stockholders' equity 13.30% 3.57% 12.88%
Dividend pay out ratio on common stock -basic 30.49% 69.05% 14.81%
-diluted 31.25% 72.50% 15.63%
Average equity to average total assets 8.82% 8.02% 7.40%
</TABLE>
(L) Borrowings
Information regarding borrowings in Note 14 to the consolidated
Financial Statements in the Annual Report to Stockholders for the year ended
December 31, 1998 is incorporated herein by reference.
Short-Term Borrowings
- ---------------------
Outstanding short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
(In Thousands)
Securities sold under agreements to repurchase $ 70,905 $ 66,025 $ 64,961
====== ====== ======
Short-term and current portion of other borrowings $ 45 $ 25,269 $ 42,221
====== ====== ======
</TABLE>
The maximum amount of securities sold under agreements to repurchase and
short-term and current portion of other borrowings outstanding at any month end
during the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
(In Thousands)
Securities sold under agreements to repurchase $ 73,392 $ 67,693 $ 64,961
====== ====== ======
Short-term and current portion of other borrowings $ 10,178 $ 74,918 $ 53,303
====== ====== ======
</TABLE>
The average balance of securities sold under agreements to repurchase
and short-term and current portion of other borrowings and weighted average
interest rates thereon for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Average Weighted Average Weighted Average Weighted
Balance Average Rate Balance Average Rate Balance Average Rate
------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
($ in Thousands)
Securities sold under
agreements to repurchase $ 67,562 4.36% $ 59,826 4.76% $ 51,220 4.76%
====== ===== ====== ===== ====== =====
Short-term and current portion
of other borrowings $ 4,681 6.15% $ 33,043 5.70% $ 33,229 5.78%
====== ===== ====== ===== ====== =====
</TABLE>
Other borrowings, consist of advances from the FHLBB. Scheduled
maturities and interest rates on such advances at December 31, are as follows:
<TABLE>
<CAPTION>
Maturity Interest Rate 1998 1997
- ----------------------------------------------- ------------- -------- --------
<S> <C> <C> <C>
(In Thousands)
January 1998 7.05% $ 15,000
March 1998 5.99% 5,000
Amortizing advance, final payment, May 1998 4.69% 470
September 1998 6.24% 3,756
October 1998 6.15% 1,000
April 2003 5.84% $ 20,000
May 2003 5.92% 10,000
Amortizing advance, final payment, October 2005 6.13% 355 395
May 2008 6.09% 10,000
October 2008 4.49% 20,000
December 2013 4.18% 20,000
January 2014 5.00% 48 48
April 2014 5.00% 78 78
June 2014 5.00% 60 60
Amortizing advance, final payment, August 2014 5.00% 67 70
------ ------
Total other borrowings 80,608 25,877
Less: short-term and current portion of other borrowings 45 25,269
------ ------
Long-term portion of other borrowings $ 80,563 $ 608
====== ======
</TABLE>
Principal payments due on long-term borrowings after December 31, 1998
are $45,000 in 1999, $48,000 in 2000, $51,000 in 2001, $55,000 in 2002,
$30,057,000 in 2003 and $50,352,000 in years thereafter. The FHLBB has the right
to call and require the repayment of $20,000,000 of borrowings at an interest
rate of 4.49% due in 2008 during 2001. Additionally, the FHLBB has the right to
call and require the repayment of $20,000,000 of borrowings at an interest rate
of 4.18% due in 2013 during 2000.
(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.
Item 2. Properties
The following table sets forth the location of the Company's offices as
of December 31, 1998. See also Notes 10 and 15 to the Consolidated Financial
Statements in the Annual Report to Stockholders for the year ended
December 31, 1998 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 <F*>
(Headquarters)
Full service Routes 9 and 63 Chesterfield Owned <F*>
Full service Elm Street at Route 101 Milford Owned <F*>
Full service Lorden Plaza Milford Leased <F*>
Full service Route 101A & 122 Amherst Owned <F*>
Full service 21 Grove Street <F1> Peterborough Owned <F*>
Full service Jct Route 101 & 202 <F2> Peterborough Leased <F*>
Full service 35 Main Street Peterborough Owned <F*>
Full service Route 101 Peterborough Plaza <F1> Peterborough Leased <F*>
Full service 70 Main Street Durham Owned <F*>
Full service Southgate Plaza, Route 1 Portsmouth Owned <F*>
Full service 93 Middle Street Portsmouth Owned <F*>
Full service 9 Child's Way and Route 9 Hillsborough Owned <F*>
Full service Lanctot's Shopping Center Rte 114 Weare Owned <F*>
Full service 62 Peterborough Street Jaffrey Owned <F*>
Full service 167 Main Street Antrim Owned <F*>
Full service 197 Loudon Road Concord Leased <F*>
Full service 66 No. Main Street Concord Leased <F*>
Full service Pennichuck Square Merrimack Leased <F*>
Full service 146 Main Street Nashua Leased <F*>
<FN>
<F*> Office includes an ATM facility. The Durham branch has two ATM
facilities on site.
<F1> The Company has notified the FDIC and the state bank commissioner
that these branches are expected to close in April 1999.
<F2> As of December 31, 1998 this branch has been closed for renovation
and is expected to reopen in April 1999.
</FN>
</TABLE>
Additionally, the Company operates twenty-one 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.
The Company believes that its current facilities are adequate to meet
its present needs, subject to possible future expansion.
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.
Additional Item. Executive Officers
Information regarding executive officers not listed as directors in the
Proxy Statement is as follows:
Charles B. Paquette (age 46) 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 43) 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 47) 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.
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 1998 and 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>
1998
----------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
Dividends declared per share $ .125 $ .125 $ .125 $ .125
Stock Price
High......................... 23.75 28.13 30.00 27.75
Low.......................... 16.50 17.63 24.75 22.75
<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>
(b) Holders
As of March 18, 1999, Granite State had approximately 1,283 common
shareholders of record.
(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 liquidation
account, as originally established, equaled the Banks' net worth 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, 1998 was
approximately $1,958,000. 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 62 of the Annual Report to Stockholders
for the year ended December 31, 1998 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 29, inclusive, of the Annual Report to Stockholders
for the year ended December 31, 1998 is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk on pages 16
to 19 inclusive, of the Annual Report to Stockholders for the year ended
December 31, 1998 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 31 to 61,
inclusive, of the Annual Report to Stockholders for the year ended
December 31, 1998 is incorporated herein by reference.
(b) Supplementary Financial Information
(1) Selected Quarterly Financial Data
The Selected Quarterly Financial Data on page 61 of the Annual Report
to Stockholders for the year ended December 31, 1998 is incorporated herein by
reference.
(2) Information on the Effects of Changing Prices
Management's discussion of the effects of inflation on page 28 of the
Annual Report to Stockholders for the year ended December 31, 1998 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.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of Granite State
on pages 3, 4 and 11 of the Proxy Statement for the 1999 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 11. Executive Compensation
Information regarding executive compensation on pages 5 to 11 of the
Proxy Statement for the 1999 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
1999 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 11 of the Proxy Statement for the 1999 Annual Meeting of Stockholders is
incorporated herein by reference.
PART IV
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, 1998, 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 31
Consolidated Statements of Financial Condition 32
Consolidated Statements of Earnings 33
Consolidated Statements of Comprehensive Income 34
Consolidated Statements of Stockholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37 - 61
(2) Financial Statements Schedules
Schedules of the Consolidated Financial Statements required by the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
The remaining information appearing in the Annual Report to Stockholders
for the year ended December 31, 1998, 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 Separation Agreement and Release 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 <F*****>
Exhibit 11 Calculations of Basic Earnings Per Share and Diluted
Earnings Per Share (See Note 3 to Notes to Consolidated
Financial Statements)
Exhibit 13 Portions of the Annual Report to Stockholders for the
year ended December 31, 1998
Exhibit 21 Subsidiary of Granite State Bankshares, Inc. (See
Part I, Item 1(a) and Item 1(c)(5)(N) of Form 10-K.)
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 1998
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, filed on March 27, 1997.
<F****> Incorporated by reference from Appendix A to the Proxy Statement for
the 1998 Annual Meeting of Stockholders.
<F*****> Incorporated by reference from Granite State Bankshares, Inc. Form
10K, Exhibit 10.8 filed on March 27, 1998
</FN>
</TABLE>
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 26, 1999 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
- -------------------- 3/26/99 Chief Executive Officer
Charles W. Smith (Principal Executive Officer)
and Chairman of the Board
/s/ William G. Pike
- ------------------- 3/26/99 Executive Vice President
William G. Pike and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Dr. David M.Bartley
- ----------------------- 3/26/99 Director
Dr.David M.Bartley
/s/ Philip M. Hamblet
- --------------------- 3/26/99 Director
Philip M. Hamblet
/s/ Joseph S. Hart
- ------------------ 3/26/99 Director
Joseph S. Hart
/s/ David J. Houston
- -------------------- 3/26/99 Director
David J. Houston
/s/ James L. Koontz
- ------------------- 3/26/99 Director
James L. Koontz
/s/ Forrest McKerley
- -------------------- 3/26/99 Director
Forrest McKerley
/s/ Jane B. Reynolds
- -------------------- 3/26/99 Director
Jane B. Reynolds
/s/ William Smedley V
- --------------------- 3/26/99 Director
William Smedley V
/s/ C. Robertson Trowbridge
- --------------------------- 3/26/99 Director
C. Robertson Trowbridge
/s/ James C. Wirths III
- ----------------------- 3/26/99 Director
James C. Wirths III
/s/ E. Story Wright
- ------------------- 3/26/99 Director
E. Story Wright
EXHIBIT 10.6
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
EMPLOYMENT SEPARATION AGREEMENT AND RELEASE WITH CHRISTOPHER J. FLYNN
EMPLOYMENT SEPARATION AGREEMENT AND RELEASE
THIS AGREEMENT AND RELEASE, is effective as of the 20th day of
November, 1998 by and between CHRISTOPHER J. FLYNN ("Executive") and GRANITE
BANK ("Granite") and GRANITE STATE BANKSHARES, INC. ("Granite State").
WHEREAS, Executive has served Granite in the position of President since
October 31, 1997; and
WHEREAS, the parties have mutually decided to discontinue Executive's
employment and directorships with Granite and Granite State (references to
Granite shall include Granite State unless otherwise indicated) on the following
terms and conditions, which contain the entire agreement of the parties relating
to the termination of Executive's employment, and any prior agreements,
including the Employment Agreement entered into by and between Executive and
Granite Bank as of October 31, 1997, ("Employment Agreement"), shall be
superceded by this Agreement and Release, unless otherwise provided herein.
NOW, THEREFORE, in consideration of the promises and payments stated and
other good and valuable consideration, the receipt and adequacy of which is
acknowledged by each of the parties and who intend to be legally bound by this
Agreement and Release, the parties state and agree as follows:
1. Executive resigns from employment with Granite effective
December 31, 1998. Executive resigns as a director of Granite effective
November 30, 1998.
2. Executive has no further obligation to perform services as an
employee of Granite. Executive and Granite have entered into a Consulting
Agreement, effective January 1, 1999 ("Consulting Agreement"), pursuant to
which Executive shall perform services as a consultant to Granite.
3. Executive shall continue to preserve the confidences and
proprietary information of Granite and its subsidiaries, parent corporations and
affiliates, including information that has been disclosed to Executive relating
to Granite's business activities, as set forth in Section 10 of the Employment
Agreement which Section is incorporated herein by reference.
4. (a) Granite Bank shall pay Executive a cash severance
payment in the aggregate amount of $558,069, payable as follows: $258,069 on
December 22, 1998; $150,000 on January 15, 1999 and $150,000 on
February 15, 1999. All payments shall be subject to requisite federal and state
tax withholding, including without limitation withholdings for Medicare, FICA,
and Federal Income Tax. The first payment is being made to Executive on or
after the Waiting Period Expiration Date (as defined in paragraph 8 of this
Agreement and Release).
(b) Executive shall be entitled to receive bi-weekly salary
payments from Granite Bank, at the rate of salary payment in effect as of the
date of this Agreement and Release, through December 31, 1998, paid in
accordance with Granite's regular payroll practices, including tax withholdings.
Executive shall be considered employed by Granite Bank for purposes of the
Granite State Employee Stock Ownership Plan through December 31, 1998.
(c) Granite shall either: (i) continue to provide medical
and dental coverage to Executive substantially identical to the coverage
maintained by Granite prior to his termination of employment, except to the
extent such coverage may be changed in its application to all Granite
Executives; or (ii) if coverage under Granite's existing plans is unavailable,
Granite shall pay the cost of providing Executive substantially equivalent
coverage, except to the extent such coverage may be changed in its application
to all Granite Executives. Such coverage shall cease upon the earlier of
December 31, 2001 or upon the date of Executive's employment with another
employer that provides substantially equivalent coverage.
(d) As of the date of this Agreement and Release, Executive
shall vest in 1,500 shares of restricted stock previously awarded to Executive
under the 1997 Long-term Incentive Stock Benefit Plan (the "Stock Benefit
Plan"). The remaining 6,000 shares of restricted stock which have been
previously awarded to Executive shall be forfeited and returned to Granite.
(e) As of the date of this Agreement and Release, Executive
shall vest in all unvested options previously awarded to Executive under the
Stock Benefit Plan . Such options shall be exercisable for so long as Executive
continues to perform services for Granite as a consultant, pursuant to the
Consulting Agreement, and within thirty days of the termination of the
Consulting Agreement, but in no event later than December 31, 2001.
(f) Executive shall retain the 1996 Ford Explorer that was
prior hereto owned by Granite and used by Executive during the term of his
employment. Title to this vehicle shall be transferred to Executive as of the
date of this Agreement and Release.
(g) The ownership of the following life insurance policies
owned by Granite shall be transferred to Executive as of the date of this
Agreement and Release: the Lincoln Benefit Life Company Flexible Premium Life
Insurance Policy, Policy Number U0207843; and the MassMutual Policy Number
7399899. Granite shall have no further interest in, or obligation under, these
policies.
5. (a) The foregoing shall satisfy all obligations of Granite
(including Granite Bank as the successor to Primary Bank) to Executive that now
exists or hereinbefore existed relating to the employment of Executive by
Granite (including Granite Bank as the successor to Primary Bank), and the
service by Executive as a director of Granite (including Granite Bank as the
successor to Primary Bank), and the termination of the employment by Granite of
Executive (and the termination of his service as a director of Granite), except
as may be set forth in the Consulting Agreement and except that Executive's
rights under any tax-qualified plan maintained by Granite shall not be effected
hereby.
(b) In consideration of the foregoing, Executive hereby irrevocably and
unconditionally, waives and releases Granite, its affiliates and subsidiaries,
officers, directors, and Executives, from any and all causes of action, debts
and claims, known and unknown, which Executive may now have or may have in the
future, concerning Executive's employment under the Employment Agreement, or
separation from service thereunder, including but not limited to any claims for
alleged breach of contract, wrongful discharge, or any rights or claims arising
out of title VII of the Civil Rights Act of 1964, as amended, the Age
Discrimination in Employment Act ("ADEA"), the Americans with Disabilities Act
("ADA"), or any other federal, state or municipal statute or ordinance relating
to discrimination in employment. However, Executive may pursue claims or
institute legal action to enforce the provisions of this Agreement and Release,
and the Consulting Agreement. Nothing herein contained shall be construed to
require Executive's release of any rights granted to him as a former employee,
officer or director of Granite under its Charter and Bylaws or under New
Hampshire law. Executive shall continue to be indemnified by Granite for any
actions taken as an employee, officer or director to the fullest extent
provided by Granite's Charter and Bylaws and New Hampshire law.
6. Executive further covenants that Executive will neither file nor
cause nor permit to be filed on Executive's behalf and, as the case may be
waives Executive's right to recover in his/her own right upon filing, any
lawsuits, claims, grievances, complaints, or charges with any Court, State,
federal or local agency, concerning or relating to any dispute arising out of
the employment relationship, alleged breaches of employment, covenants or
contracts, abusive or wrongful and constructive discharge, unlawful employment
discrimination, or otherwise relating to Executive's employment or resignation
from that employment with Granite.
7. Both parties agree that this is a separation of convenience, and
neither party will state or infer a contrary intention or understanding.
Neither the Chief Executive Officer nor the Chief Financial Officer of Granite
is aware, as of the date of this Agreement, of any basis for any claim by
Granite against Executive relating to Executive's service as an employee of
Granite. The nature and terms of the parties Agreement and Release are
Confidential and may not be publicly disclosed with the exception of required
court documents prepared and filed in connection with legal actions initiated
to enforce the provisions of this Agreement and Release.
8. (a) Executive further states that Executive has carefully
read the foregoing, has had sufficient opportunity to review and deliberate the
foregoing with or without counsel of Executive's own choosing, knows and
understands its contents, and signs the same as Executive's free and independent
act. No inducements, representations, or agreements have been made or relied
upon to make this Agreement and Release except as stated in this Agreement and
Release.
(b) Executive has twenty-one (21) days from November 20,
1998 (the date of the initial receipt of these terms) within which to consider
accepting and being bound by the terms of this Agreement and Release. Executive
understands and acknowledges that this release and waiver of claims is exchanged
for the payments described in Paragraph 4. Executive also understands that he
may revoke this waiver and release of claims under the ADEA for a period of
seven (7) days following the date the Executive signs this Agreement and Release
and that the Executive's waiver of the ADEA claims will not become effective
until the revocation period has expired. Such date that is seven (7) days after
Executive signs this Agreement and Release is referred to as the "Waiting Period
Expiration Date."
9. Section 9 of the Employment Agreement shall remain in effect as
to Executive for the one year period from December 31, 1998.
10. This Agreement and Release may not be amended or modified except
in a writing signed by the party to be charged. This Agreement and Release
constitutes the entire understanding of the parties, and all prior discussions
and agreements between the parties are merged herein.
11. Any term or provision of this Agreement and Release which is
held to be invalid or unenforceable shall be ineffective to the extent of such
invalidity or unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement and Release.
12. The terms and provisions of, and the obligations under, the
Employment Agreement shall be superceded by this Agreement and Release, and
shall be of no further force or effect, unless otherwise expressly stated
herein.
IN WITNESS WHEREOF, the parties hereto have signed their Agreement and
Release.
DATE: November 20, 1998
/s/ Christopher J. Flynn
- ------------------------
Christopher J. Flynn
GRANITE BANK
/s/ Charles W. Smith
- --------------------
Charles W. Smith
GRANITE STATE BANKSHARES, INC.
/s/ Charles W. Smith
- --------------------
Charles W. Smith
STATE OF NEW HAMPSHIRE )
: ss.
COUNTY OF CHESHIRE )
On this 20th day of November, 1998, before me personally came
CHRISTOPHER J. FLYNN, to me known, and known to me to be the individual
described in the foregoing instrument, who, by his free act and deed, signed his
name to the foregoing instrument.
/s/ Faith E. Wilder
-------------------
Notary Public
STATE OF NEW HAMPSHIRE )
: ss.:
COUNTY OF CHESHIRE )
On this 20th day of November, 1998, before me personally came
Charles W. Smith, to me known, who, being by me duly sworn, did depose and say
that he is an executive officer of GRANITE BANK, the bank described in and which
executed the foregoing instrument; that he knows the seal of said bank; that the
seal affixed to said instrument is such seal; that it was so affixed by
authority of the Board of Directors of said bank; and that he signed his or her
name thereto by like authority.
/s/ Faith E. Wilder
-------------------
Notary Public
STATE OF NEW HAMPSHIRE )
: ss.:
COUNTY OF CHESHIRE )
On this 20TH day of November, 1998, before me personally came
Charles W. Smith, to me known, who, being by me duly sworn, did depose and say
that he is an executive officer of GRANITE STATE BANKSHARES, INC., the
corporation described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such seal; that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
/s/ Faith E. Wilder
-------------------
Notary Public
EXHIBIT 13
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 nineteen full service offices and an additional twenty
one 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 6.3% of total deposits at December 31, 1998) 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 areas.
Forward-Looking Statements
Certain statements contained herein are not based on historical facts
and are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. 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 December
31, 1998 are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Such forward-
looking statements may be identified by reference to a future period or
periods, or by the use of forward-looking terminology, such as "may,"
"will," "believe," "expect," "estimate," "anticipate," "continue," or
similar terms or variations on those terms, or the negative of these terms.
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.
Acquisition
Effective after the close of business October 31, 1997, the Company
completed its merger with 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 periods presented prior to the merger
<PAGE> 11
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. The acquisition provided an expanded penetration of the Company
into commercial and industrial lending and served to connect existing branch
facilities in southwestern, central and southeastern New Hampshire. Expenses
directly attributable to the merger were charged to earnings at the date of
combination and are described in detail in the noninterest expense portion of
the results of operations section of this Management's Discussion and
Analysis.
FINANCIAL CONDITION
Consolidated assets at December 31, 1998 were $878.1 million, up $64.4
million or 7.9% from $813.7 million at December 31, 1997.
Interest Bearing Deposits in other banks
Interest bearing deposits in other banks, which primarily consist of
deposits with the Federal Home Loan Bank of Boston ("FHLBB"), were $19.5
million at December 31, 1998 and $27.5 million at December 31, 1997. 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 in accumulated other comprehensive income as a
separate 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 1998, 1997 or 1996.
At December 31, 1998 and 1997, the carrying values of securities held
to maturity and securities available for sale consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Securities held to maturity
US Government agency obligations $ 17,265 $ 33,910
Other corporate obligations 5,012
---------------------
Total securities held to maturity $ 22,277 $ 33,910
=====================
Securities available for sale
US Treasury obligations $ 83,716 $ 82,969
US Government agency obligations 55,998 44,199
Other corporate obligations 46,457 8,508
Mortgage-backed securities 11,698 21,508
Mutual funds 6,402 6,113
Marketable equity securities 15,494 15,383
---------------------
Total securities available for sale $219,765 $178,680
=====================
</TABLE>
At December 31, 1998 the net unrealized gains on securities available
for sale, net of related tax effects were $1.6 million, compared to $5.7
million at December 31, 1997. These net unrealized gains are shown in
accumulated other comprehensive income 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 in the fourth quarter of
1997.
The weighted average maturity for all debt securities held to maturity
and available for sale, excluding mortgage-backed securities, is 48 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 281 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.
The decrease in securities held to maturity were primarily used to
fund increases in net loans and securities available for sale, while the
increase in securities available for sale was attributable to the increased
level of other borrowings with the FHLBB, as well as reductions in the level
of cash and due from banks and interest bearing deposits in other banks.
<PAGE> 12
Loans
At December 31, 1998 and 1997 the Company's loan portfolio consisted
of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Commercial, financial and
agricultural $ 48,418 $ 68,513
Real estate-residential 328,243 245,577
Real estate-commercial 146,093 151,474
Real estate-construction
and land development 2,281 6,000
Installment 7,809 11,588
Other 22,855 26,013
---------------------
Total loans 555,699 509,165
Less:
Unearned income (1,506) (1,432)
Allowance for possible loan
losses (7,122) (7,651)
---------------------
Net loans $547,071 $500,082
=====================
</TABLE>
Loans outstanding before deductions for unearned income and the
allowance for possible loan losses increased $46.5 million or 9.14% to
$555.7 million at December 31, 1998 from $509.2 million at December 31,
1997.
Residential real estate loans increased $82.7 million or 33.66% to
$328.2 million at December 31, 1998 from $245.6 million at December 31,
1997. The increase in residential real estate loans occurred throughout 1998
as the low interest rate environment during 1997 continued throughout 1998
and encouraged borrowers to refinance their loans. New home purchases were
also stronger in 1998 than during 1997.
As shown in the table above, commercial, financial and agricultural
loans decreased $20.1 million, or 29.33%, commercial real estate loans
decreased $5.4 million, or 3.55% and real estate construction and land
development loans decreased $3.7 million or 61.98% in 1998 compared to 1997.
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 in 1998 and
the highly competitive environment for attracting loans amongst financial
institutions in the Company's market areas, coupled with borrowers of
certain loans, assumed in the merger with Primary Bank in October 1997,
refinancing their loans with other financial institutions during 1998. The
decrease in real estate construction and land development loans related
primarily to the pace of loan repayments, coupled with the Company's general
determination not to originate new land development loans.
Decreases in installment loans of $3.8 million, or 32.61% and other
loans of $3.2 million, or 12.14% were due to the competitive, low interest
rate environment that was prevalent during 1998, which allowed borrowers to
find alternative forms of financing for consumer purchases at lower rates,
coupled with the ability of borrowers refinancing their residential real
estate loans to include other borrowings in the refinanced loans.
Total loan originations during 1998 and 1997, were $238.8 million and
$248.1 million, respectively. Loan originations for portfolio, excluding
loans originated for sale in the secondary mortgage market during 1998 and
1997 were $198.7 million and $221.7 million, respectively. Loan repayments
for 1998 and 1997, were $149.4 million and $153.1 million, respectively.
Loans charged off, net during 1998 and 1997 were $1.7 million and $1.0
million, respectively. Loans transferred to other real estate owned during
1998 and 1997 amounted to $724 thousand and $732 thousand, respectively.
The subsidiary bank originates fixed rate residential loans for sale
in the secondary mortgage market. Mortgage loans held for sale at December
31, 1998 and 1997 were $1.8 million and $1.1 million, respectively. Loans
originated for sale in the secondary mortgage market during 1998 and 1997
were $40.1 million and $26.4 million, respectively. Loans sold in the
secondary mortgage market during 1998 and 1997 were $39.3 million and $26.4
million, respectively. The Company began originating fifteen year fixed rate
residential real estate 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 residential real estate loans for
sale in the secondary mortgage market. At December 31, 1998 and 1997 the
Company serviced residential real estate loans for others totaling $148.0
million and $163.9 million, respectively.
Risk Elements
The Company's management believes that New Hampshire has witnessed
steady economic growth since 1992. There can be no assurance that this will
continue to be the case, however, and the economies and real estate markets
in the Company's primary market areas will continue to be significant
determinants of the quality of the Company's assets in future periods, and
thus its results of operations.
The following table sets forth the Company's nonperforming loans and
other real estate owned at the dates indicated. The Company generally does
not accrue interest on any loans that are 90 days or more past due, unless
the loan is well secured and in the process of collection. At the dates
indicated, all loans delinquent 90 days or more were on nonaccrual status
and
<PAGE> 13
therefore considered nonperforming, with the exception of $146 thousand of
loans at December 31, 1998, $535 thousand of loans at December 31, 1997, and
$93 thousand of loans at December 31, 1996, all of which were in the process
of collection at those dates.
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997 1996
---- ---- ----
($ In Thousands)
<S> <C> <C> <C>
Nonperforming loans:
Residential real estate $1,347 $1,489 $2,707
Commercial real estate 592 4,261 1,032
Construction and land
development real estate 378 92 102
Commercial, financial and
agricultural 678 956 204
Installment and other 18 347 41
----------------------------
Total nonperforming
loans 3,013 7,145 4,086
Total other real estate
owned 1,601 1,905 3,492
----------------------------
Total nonperforming
assets $4,614 $9,050 $7,578
============================
Ratios:
Total nonperforming loans
to total loans 0.54% 1.40% 0.92%
============================
Total nonperforming assets
to total assets 0.53% 1.11% 0.95%
============================
</TABLE>
The Company's nonperforming assets decreased $4.4 million or 49.02%
from $9.0 million at December 31, 1997 to $4.6 million at December 31, 1998.
The decrease in nonperforming assets relates primarily to decreases in
nonperforming commercial real estate loans of $3.7 million, a decrease in
nonperforming installment and other loans of $329 thousand, a decrease in
nonperforming commercial, financial and agricultural loans of $278 thousand,
a decrease in nonperforming residential real estate loans of $142 thousand,
and a decrease in other real estate owned of $304 thousand, partially offset
by an increase in nonperforming construction and land development loans of
$286 thousand. The decrease in nonperforming assets relates to the Company's
continued focus on asset quality issues and the significant resources
allocated to the asset quality control functions of credit policy and
administration and loan review. The asset workout and collection functions
focus on reducing nonperforming assets. Despite the continued focus on asset
quality and reduction of nonperforming asset levels, there can be no
assurance that adverse changes in economic conditions and the real estate
markets in the Company's primary market areas will not result in higher
levels of nonperforming assets in the future and negatively impact the
Company's operations through higher provisions for possible loan losses,
decreases in accruals of interest income and increased noninterest expenses
relating to the collection and workout of nonperforming assets.
The Company has identified loans as impaired in accordance with
Statement of Financial Accounting Standards ("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 $1.6 million
and $4.6 million, respectively, at December 31, 1998 and 1997. The average
recorded investment in impaired loans was $3.5 million, $3.0 million and
$3.9 million, respectively, in 1998, 1997 and 1996. No income was recognized
on impaired loans during 1998 and 1997 and $4 thousand of income was
recognized during 1996. Total cash collected on impaired loans during 1998,
1997 and 1996 was $710 thousand, $779 thousand and $2.4 million,
respectively, all of which with the exception of $4 thousand recognized as
income during 1996, was credited to the principal balance outstanding on
such loans.
The portion of the allowance for possible loan losses applicable to
impaired loans amounted to $233 thousand, $1.1 million, $457 thousand and
$1.1 million, respectively, at December 31, 1998, 1997, 1996 and 1995.
During 1998, 1997 and 1996, provisions for possible loan losses applicable
to impaired loans were $201 thousand, $1.0 million and $499 thousand,
respectively. Impaired loans charged off during 1998, 1997 and 1996 were
$1.0 million, $386 thousand and $1.2 million, respectively. At December 31,
1998, 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 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
<PAGE> 14
real estate owned amounted to $1.6 million and $1.9 million at December 31,
1998 and 1997, respectively. See note 11 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. 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, including
trends in nonperforming loans expected to result from changes in existing
conditions; historical loan charge-off experience; and the results of bank
regulatory examinations.
At December 31, 1998, 1997 and 1996, the allowance for possible loan
losses was $7.1 million, $7.7 million and $6.3 million, respectively, and
the ratio of the allowance to total loans outstanding was 1.28%, 1.50% and
1.41%, respectively. At December 31, 1998, 1997 and 1996, the allowance for
possible loan losses represented 236.4%, 107.1% and 153.0%, respectively, of
nonperforming loans. The amount of the allowance for possible loan losses
decreased at December 31, 1998 compared to December 31, 1997, primarily as a
result of decreases in nonperforming and impaired loans and a change in the
composition of the loan portfolio which was more predominantly residential
real estate in 1998, partially offset by the overall growth of the loan
portfolio. The amount of the allowance for possible loan losses increased at
December 31, 1997 compared to December 31, 1996, primarily as a result of
increases in nonperforming and impaired loans, and an increase in the total
loan portfolio, including growth in commercial business loans and commercial
real estate loans.
While management believes that the allowance for possible loan losses
at December 31, 1998 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, 1998 and 1997 follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
NOW accounts $203,068 $166,773
Savings accounts 87,150 89,278
Money market deposit accounts 19,659 31,486
Time certificates 266,901 290,176
---------------------
Total interest bearing deposits 576,778 577,713
Noninterest bearing deposits 73,709 71,270
---------------------
Total deposits $650,487 $648,983
=====================
</TABLE>
Total deposits remained relatively stable increasing $1.5 million, or
0.23% during 1998. The decrease in time certificates of $23.3 million and a
portion of the $11.8 million decrease in money market deposit accounts
related primarily to depositors looking to achieve higher yields by
investing their funds in alternate sources outside of traditional bank
products, while the continued success of the NOW account product introduced
by the subsidiary bank in 1995 contributed to the $36.3 million increase in
NOW accounts and the decrease in a portion of the money market deposit
accounts, as some money market deposit accounts shifted into the NOW account
product. Noninterest bearing deposits increased $2.4 million, while savings
accounts decreased $2.1 million during 1998.
Time certificates with minimum balances of $100 thousand decreased
$3.9 million, from $37.4 million at December 31, 1997 to $33.5 million at
December 31, 1998. The Company does not use brokers to solicit deposits.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase increased $4.9 million
or 7.4% to $70.9 million at December 31, 1998 from
<PAGE> 15
$66.0 million at December 31, 1997. The increase in securities sold under
agreements to repurchase was used to fund loan growth. These short-term
borrowings are instruments which are used by municipalities and businesses
to invest their excess cash and are collateralized by US Treasury and US
Government Agency obligations.
Other Borrowings
Other borrowings which consists of borrowings from the FHLBB increased
$54.7 million from $25.9 million at December 31, 1997 to $80.6 million at
December 31, 1998. Proceeds of new borrowings from the FHLBB during 1998
were $80.0 million and repayments were $25.3 million. FHLBB borrowings
increased because the growth in interest earning assets, primarily loans and
to a lesser extent securities available for sale exceeded the growth in
deposits and securities sold under agreements to repurchase.
Stockholders' Equity
Stockholders' equity was $72.6 million at December 31, 1998, an
increase of $5.7 million from $66.9 million at December 31, 1997. Book value
per share was $12.31 at December 31, 1998, up $0.30 or 2.5% from $12.01 at
December 31, 1997. See "Capital Resources and Liquidity" for further
information on stockholders' equity.
Risk Management
In the normal course of business, the Company is subject to various
risks, the most significant of which are credit, liquidity and market risk,
which includes interest rate risk. Although the Company cannot eliminate
these risks, it has risk management processes designed to provide for risk
indentification, measurement, monitoring and control. The Board of Directors
establishes policies with respect to risk management, lending, investment,
asset/liability management and interest rate risk and reviews and approves
these policies annually. The Board of Directors delegates the responsibility
for carrying out these policies to management.
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, loan underwriting policies and procedures and
loan monitoring practices.
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 to 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.
Market risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. The risk of loss can be
reflected in diminished current values and/or reduced potential net interest
income in future periods. The Company's market risk arises primarily from
interest rate risk. The Company is also exposed to market price risk through
its investments in marketable equity securities.
Asset/Liability Management, Interest Rate Sensitivity
and Market Risk
The Company's primary objective regarding asset/liability management
is to position the Company so that changes in interest rates do not have a
material adverse impact upon net earnings (through changes in net interest
and dividend income) and the estimated net present value of equity of the
Company. The Company's primary strategy for accomplishing its
asset/liability management objective is achieved by managing the weighted
average maturities of assets, liabilities and off-balance-sheet items
(duration matching). At December 31, 1998, approximately 65.6% of the
Company's loan portfolio was comprised of adjustable rate loans.
Approximately 69.2% 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 41.0% of total deposits and 46.3%
of interest bearing deposits are comprised 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. At December 31,
1998 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. The Company receives an interest payment if the
three-
<PAGE> 16
month London Interbank Offer Rate ("LIBOR") increases above the strike rate.
To measure the impact of interest rate changes, the Company utilizes a
comprehensive financial planning model that recalculates the estimated net
present value of equity and net interest and dividend income of the Company
assuming instantaneous, permanent parallel shifts in the yield curve of both
up and down 100 and 200 basis points. Larger increases or decreases in
estimated net interest and dividend income and the estimated net present
value of equity 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.
The Company endeavors to maintain a position where it experiences no
material changes in estimated net present value of equity and no material
fluctuation in estimated net interest and dividend income 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 forecasts 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, 1998. 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. Certain marketable
equity securities and stock in the FHLBB totaling $20.7 million, are not
susceptible to interest rate sensitivity and have therefore been excluded
from this analysis. The gap maturity categories for savings deposits
(including NOW, savings, and money market deposit 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 $3.0 million have been excluded from this
analysis.
<PAGE> 17
INTEREST RATE SENSITIVITY GAP ANALYSIS
at December 31, 1998
<TABLE>
<CAPTION>
Sensitivity Period
-------------------------------------------------------------------
0-6 6 Months- 1-3 3-5 Over
Months 1 Year Years Years 5 Years Total
------ -------- ----- ----- ------- -----
($ In Thousands)
<S> <S> <C> <C> <C> <C> <C> <C>
Rate-sensitive Assets:
Interest bearing deposits in other
banks.....................................$ $ 19,532 $ 19,532
Rate 4.84% 4.84%
Securities.................................$ 33,788 $ 37,180 $ 52,563 $ 65,082 $ 39,935 228,548
Rate 5.75% 5.88% 5.97% 5.92% 6.32% 5.97%
Loans and loans held for sale..............$ 152,978 78,387 87,906 82,831 150,906 553,008
Rate 8.87% 8.47% 8.21% 8.32% 6.99% 8.11%
----------------------------------------------------------------------
Total................................... $206,298 $115,567 $140,469 $147,913 $190,841 $801,088
======================================================================
Rate-sensitive Liabilities:
Money Market Deposit
Accounts..................................$ $ 3,932 $ 5,898 $ 9,829 $ 19,659
Rate 2.56% 2.56% 2.56% 2.56%
Savings and NOW Accounts...................$ 23,217 34,826 116,087 $ 58,044 $ 58,044 290,218
Rate 2.32% 2.32% 2.32% 2.32% 2.32% 2.32%
Time certificates..........................$ 103,301 122,849 34,221 6,218 312 266,901
Rate 5.13% 5.52% 5.77% 5.68% 5.55% 5.41%
Securities sold under
agreements to repurchase and
other borrowings..........................$ 70,583 367 99 30,112 50,352 151,513
Rate 4.29% 4.71% 6.06% 5.87% 4.69% 4.74%
----------------------------------------------------------------------
Total................................... $201,033 $163,940 $160,236 $ 94,374 $108,708 $728,291
======================================================================
Period Sensitivity Gap........................ $ 5,265 $(48,373) $(19,767) $ 53,539 $ 82,133 $ 72,797
Cumulative Sensitivity Gap.................... $ 5,265 $(43,108) $(62,875) $ (9,336) $ 72,797
Cumulative Sensitivity Gap as a
Percent of Total Rate-sensitive Assets....... 0.66% (5.38)% (7.85)% (1.17)% 9.09%
</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 estimated net interest and dividend income
and discounted cash flow market value sensitivities referred to above.
The Company's limits on interest rate risk specify that if interest
rates were to shift immediately up or down 200 basis points, hypothetical
net interest and dividend income should decline by less than 8%. The change
in hypothetical net interest and dividend income would not differ materially
from the change in pretax earnings. Additionally, the Company's limits on
interest rate risk also specify that if interest rates were to shift
immediately up or down 200 basis points, the change in the estimated net
present value of equity should decline by less than 15%. The following table
presents as of December 31, 1998, the Company's interest rate risk as
measured by the changes in the estimated net present value of equity and
hypothetical net interest and dividend income for instantaneous and
sustained parallel shifts of 100 and 200 basis points in market interest
rates.
<PAGE> 18
<TABLE>
<CAPTION>
$ Change in % Change in
$ Change in Estimated % Change in Estimated Hypothetical Net Hypothetical Net
Change in Net Present Net Present Interest and Interest and
Interest Rates Value of Equity Value of Equity Dividend Income Dividend Income
- -------------- --------------------- --------------------- ---------------- ----------------
(Basis Points) (In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
+200 $(3,503) (3.21)% $(567) (1.72)%
+100 18 0.02 140 0.43
Flat Rate 0 0 0 0
-100 (3,509) (3.21) 261 0.79
-200 (8,196) (7.50) (84) (0.26)
</TABLE>
Management also believes that the assumptions utilized in evaluating
the vulnerability of the Company's net interest and dividend income and
estimated net present value of equity 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 estimated net present value of equity or estimated
net interest and dividend income, 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 estimated net present value of
equity or estimated net interest and dividend income 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.
The Company maintains a portfolio of marketable equity securities,
which are included in securities available for sale, and had estimated fair
values of $15.5 million and an original cost of $14.1 million at December
31, 1998. Such securities are recorded at estimated fair market value, and
are subject to market price risk. The risk is the potential loss in
estimated fair value resulting from adverse changes in prices quoted by
stock markets. The Company manages its market price risk by closely
monitoring market developments and reviewing current financial statements
and other reports published by the issuers of the equity securities.
Within the Company's portfolio of marketable equity securities, an
analysis of significant quarterly movements in stock prices over the last
three years, or since the stock was initially offered for purchase if less
than three years, indicated a 10-20% movement in prices in 26% of the
quarters, a 20-25% movement in prices in 10% of the quarters and a 25-35%
movement in prices in 12% of the quarters. The market price risk in the
Company's marketable equity securities portfolio, assuming hypothetical
decreases in quoted stock prices of 10%, 25% and 35%, would amount to $1.5
million, $3.9 million and $5.4 milllion, respectively. The after tax impact
on capital relating to these hypothetical decreases in stock prices would be
$1.0 million, $2.4 million and $3.3 million, respectively.
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, 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, 1998 and 1997
Net Earnings
Operations in 1998 resulted in net earnings of $9.6 million, an
increase of $7.3 million over net earnings of $2.3 million for 1997. Basic
earnings per share was $1.64 in 1998 compared to $.42 in 1997. Diluted
earnings per share was $1.60 in 1998 compared to $.40 in 1997.
Earnings before income taxes were $14.7 million in 1998, an increase
of $11.7 million compared to earnings before income taxes of $3.0 million in
1997. Earnings before income taxes increased in 1998 compared to 1997,
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> 19
Net Interest and Dividend Income
Net interest and dividend income was $31.0 million and $30.1 million
in 1998 and 1997, respectively. The increase of $862 thousand in 1998
compared to 1997 relates to an increase of $11.1 million or 1.50% in average
interest earning assets to $751.3 million in 1998 from $740.2 million in
1997 and a decrease in average interest bearing liabilities of $4.9 million,
or 0.73%, to $669.2 million in 1998 from $674.1 million in 1997, while the
interest rate spread was fairly stable at 3.67% in 1998 compared to 3.68% in
1997.
Interest income on loans increased $3.5 million to $45.8 million in
1998 from $42.3 million in 1997. The increase was primarily the result of an
increase in the average loan balances of $61.8 million, or 13.00%, to $536.6
million in 1998 from $474.8 million in 1997, partially offset by a decrease
in average loan yields to 8.54% in 1998 from 8.91% in 1997. The increase in
average balances in the loan portfolio reflects strong loan demand in the
residential real estate market during 1998 as a result of the continued low
interest rate environment which encouraged refinancing, as well as new home
purchases in the subsidiary bank's market areas. 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 1998 compared to 1997. The competitive loan environment
also resulted in a decrease in the Company's commercial, financial and
agricultural loans and commercial real estate loans, which also contributed
to the lower yields realized on loans in 1998 compared to 1997. 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
decreased $4.1 million to $11.8 million in 1998 from $15.9 million in 1997.
The decrease relates primarily to a decrease in the average balances of
securities, including stock in FHLBB of $55.7 million to $195.1 million in
1998 from $250.8 million in 1997, coupled with a decrease in yields to 6.03%
in 1998 from 6.35% in 1997. The decrease in average balances of securities
is due to a change in mix of assets to higher yielding loans from lower
yielding securities during 1998. The decrease in yields was primarily the
result of the continued low interest rate environment that was prevalent
during 1998.
Interest expense on deposits decreased $768 thousand to $22.6 million
in 1998 from $23.3 million in 1997, with interest on time deposits
decreasing $1.0 million, partially offset by an increase in interest on
savings deposits of $255 thousand. The decrease related primarily to a
decrease in the average cost of deposits to 4.00% during 1998 compared to
4.11% during 1997, coupled with a decrease in the average balances of
deposits of $2.6 million to $564.4 million in 1998 from $567.0 million in
1997. Average balances of time certificates decreased $15.7 million to
$267.8 million during 1998 from $283.5 million during 1997 which was
partially offset by an increase in average balances of savings deposits of
$13.1 million to $296.6 million during 1998 from $283.5 million during 1997.
The decrease in the average balances of time certificates related primarily
to depositors looking to achieve higher yields by investing their funds in
alternate sources outside of traditional bank products, while the continued
success of the NOW account product introduced by the subsidiary bank in 1995
was the primary reason for the increase in the average balances of savings
deposits.
Interest expense on securities sold under agreements to repurchase and
other borrowings decreased $479 thousand to $5.1 million in 1998 from $5.6
million in 1997. The decrease was primarily related to a decrease in the
cost of these borrowings to 4.87% in 1998 compared to 5.21% in 1997, coupled
with a decrease in the average balances of $2.3 million to $104.8 million in
1998 from $107.1 million in 1997. The decrease in average balances related
to a decrease in average balances of other borrowings of $10.0 million,
partially offset by an increase in the average balances on securities sold
under agreements to repurchase of $7.7 million. The increase of $7.7 million
was primarily the result of local municipalities and commercial accounts
making greater use of securities sold under agreements to repurchase in
investing their excess funds. The cost of securities sold under agreements
to repurchase was 4.36% and 4.76% in 1998 and 1997, respectively, while the
cost of other borrowings was relatively stable, at 5.79% during 1998 and
5.78% during 1997.
<PAGE> 20
Average Balance Sheets and Net Interest and Dividend Income
The following table presents, for the periods indicated, average
balances, the total dollar amount of interest and dividend income from
interest earning assets and their resultant yields, as well as the interest
expense on interest bearing liabilities, and their resultant costs:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------ ------- -------- ------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans and loans held for sale<F1> $536,596 $45,832 8.54% $474,844 $42,307 8.91% $423,421 $37,969 8.97%
Interest bearing deposits in other banks 19,634 1,029 5.24 14,570 781 5.36 16,956 857 5.05
Securities, including stock in FHLBB<F2> 195,051 11,765 6.03 250,783 15,923 6.35 254,599 15,604 6.13
-------- ------- -------- ------- -------- -------
Total interest earning assets 751,281 58,626 7.80 740,197 59,011 7.97 694,976 54,430 7.83
------- ------- -------
Non-interest earning assets 70,690 72,400 66,828
Allowance for possible loan losses (7,557) (6,594) (6,702)
-------- -------- --------
Total assets $814,414 $806,003 $755,102
======== ======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities
Savings deposits $296,639 7,684 2.59 $283,512 7,429 2.62 $274,136 7,212 2.63
Time deposits 267,764 14,870 5.55 283,514 15,893 5.61 262,165 14,787 5.64
-------- ------- -------- ------- -------- -------
Total interest bearing deposits 564,403 22,554 4.00 567,026 23,322 4.11 536,301 21,999 4.10
Securities sold under agreements to repurchase
and other borrowings 104,784 5,099 4.87 107,062 5,578 5.21 100,304 5,244 5.23
-------- ------- -------- ------- -------- -------
Total interest bearing liabilities 669,187 27,653 4.13 674,088 28,900 4.29 636,605 27,243 4.28
------- ------- -------
Non-interest bearing liabilities
Demand deposits 69,575 63,870 58,935
Other liabilities 3,784 3,368 3,669
-------- -------- --------
Total non-interest bearing liabilities 73,359 67,238 62,604
Stockholders' equity 71,868 64,677 55,893
-------- -------- --------
Total liabilities and stockholders' equity $814,414 $806,003 $755,102
======== ======== ========
Net interest and dividend income/interest rate
spread $30,973 3.67% $30,111 3.68% $27,187 3.55%
======= ==== ======= ==== ======= ====
Net earning balance/net yield on interest earning
assets $ 82,094 4.12% $ 66,109 4.07% $ 58,371 3.91%
======== ==== ======== ==== ======== ====
<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> 21
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, 1998 vs. 1997
Increase (Decrease) Due To
-------------------------------------
Volume Rate Total
------ ---- -----
(In Thousands)
<S> <C> <C> <C>
Interest income on loans $ 5,179 $(1,654) $ 3,525
Interest income on interest bearing deposits in other banks 265 (17) 248
Interest and dividend income on securities and stock in FHLBB (3,389) (769) (4,158)
--------------------------------
Total interest and dividend income 2,055 (2,440) (385)
--------------------------------
Interest expense on deposits (113) (655) (768)
Interest expense on securities sold under agreements to
repurchase and other borrowings (118) (361) (479)
--------------------------------
Total interest expense (231) (1,016) (1,247)
--------------------------------
Net interest and dividend income $ 2,286 $(1,424) $ 862
================================
<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 other banks (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
================================
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses was $1.1 million in 1998,
representing a $1.3 million or 53.6% decrease from the provision of $2.4
million in 1997. The decrease in the provision resulted primarily from a
change in the mix of loans to residential real estate loans, which accounted
for 59.1% of the total loan portfolio at December 31, 1998 compared to 48.2%
at December 31, 1997, while commercial real estate and commercial and
industrial loans accounted for 35.0% of the total loan portfolio in 1998
compared to 43.2% in 1997. Also contributing to the decrease in the
provision was a decrease of $4.1 million in nonperforming loans to $3.0
million at December 31, 1998 from $7.1 million at December 31, 1997, 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
1998 were $2.1 million compared to $1.2 million in 1997. Recoveries of loans
previously charged off were $459 thousand in 1998 compared to $178 thousand
in 1997. Net loans charged off were $1.7 million in 1998 compared to $1.0
million in 1997.
Noninterest Income
Noninterest income was $9.1 million in 1998, an increase of $2.0
million or 27.48% compared to $7.1 million in 1997. The increase in 1998
over 1997, was primarily attributable to increases in net gains on sales of
securities available for sale of $2.0 million, net gains on sales of loans
into the secondary mortgage market of $310 thousand and other noninterest
income of $397 thousand, partially offset by decreases in customer account
fees and service charges of $686 thousand and mortgage service fees of $68
thousand. The increase in net gains on sales of securi-
<PAGE> 22
ties available for sale was a result of the Company continuing to closely
monitor the equity markets in light of their continued volatility in 1998.
The increase in net gains on sales of loans in the secondary mortgage market
was as a result of an increase in loans originated for and sold into the
secondary mortgage market in 1998 compared to 1997, because of the continued
low interest rate environment during 1998, which kept demand for residential
real estate loans at a very high level. The increase in other noninterest
income was primarily as a result of gains on sales of other assets during
1998. The decrease in customer account fees and service charges related to
the elimination of and/or restructuring of certain deposit programs which the
Company assumed in its merger with Primary Bank in 1997. The elimination
and/or restructuring of these deposit programs provided efficiencies through
the reduction of noninterest expense.
Noninterest Expense
Noninterest expense was $24.2 million in 1998, a decrease of $7.6
million compared to $31.8 million in 1997. The decrease was primarily
attributable to a decrease in salaries and benefit expenses of $1.4 million
to $12.4 million in 1998 compared to $13.8 million in 1997 and a decrease in
merger-related costs from $5.9 million in 1997 to $34 thousand in 1998.
The decrease in salaries and benefits expense of $1.4 million was
primarily attributable to a decrease in salaries, related to personnel
efficiencies realized from the merger with Primary Bank, which were
partially offset by normal salary increases, increased costs for commissions
to loan originators and nondeposit product sales staff and $760 thousand
relating to the cost of termination of certain officers. Additionally,
decreases in employee benefits related primarily to merger efficiencies and
a $1.1 million expense incurred in 1997 associated with the vesting of
performance based stock options assumed in the merger with Primary Bank, for
which there was no related expense in 1998, partially offset by an increase
of $362,000 in expense related to the 1998 restricted stock grants.
Occupancy and equipment expense increased $761 thousand from $4.2
million in 1997 to $5.0 million in 1998. The increase is primarily
attributable to the Company recording a $712 thousand writedown on bank
buildings based upon an appraisal on property used as a branch office which
is being closed.
Other real estate owned expense increased $294 thousand from $63
thousand in 1997 to $357 thousand in 1998 as a result of an increase in
foreclosure activity related to nonperforming loans and costs related to the
disposition of foreclosed properties.
In connection with the completion of the merger with Primary Bank,
effective after the close of business October 31, 1997, the Company incurred
merger-related charges of $5.9 million which were recorded at the date of
combination. Merger-related charges associated with the Primary Bank merger
in 1998 were $34 thousand.
Other expenses decreased $1.4 million primarily as a result of
efficiencies realized in the merger with Primary Bank in the following
areas: advertising and marketing expenses decreased $643 thousand, data
processing and transmission costs decreased $614 thousand, general liability
insurance decreased $154 thousand and directors fees decreased $167
thousand. These efficiencies were offset by increases in amortization
expense of $56 thousand, an increase in Year 2000 expenses of $101 thousand
from $0 in 1997 to $101 thousand in 1998 and an increase in telephone
expense of $119 thousand. The increase in amortization expense was primarily
attributable to increases in originated mortgage servicing rights, while the
increase in telephone expense relates to increased data transmission and
call volume amongst the branch network as well as higher customer call
volume for account activity through the subsidiary bank's telephone banking
system in 1998 as compared with 1997.
Income Taxes
Income tax expense increased $4.4 million to $5.1 million in 1998
compared to $704 thousand in 1997 and represented effective tax rates of
35.0% and 23.4%, respectively, of pretax income. The reason the tax rate is
lower in 1997 compared to 1998, relates primarily to the reversal in 1997 of
the remainder of the valuation allowance on deferred tax assets established
for net operating losses as a result of current and projected earnings,
partially offset by nondeductible merger related charges and nondeductible
performance based stock option charges incurred in 1997.
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.
<PAGE> 23
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
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.
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 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.
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 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
<PAGE> 24
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.
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 on deferred tax assets
established for net operating losses as a result of current and projected
earnings, partially offset by nondeductible merger related charges and
nondeductible performance based stock option charges. The reason the tax
rate in 1996 is lower than the statutory tax rate of 34% relates primarily
to the reversal of a portion of the valuation allowance on deferred tax
assets established for net operating losses as a result of current and
projected earnings.
Capital Resources and Liquidity
Capital Resources
The Company's capital base totaled $72.6 million or 8.27% of total
assets at December 31, 1998 compared to $66.9 million, or 8.22% of total
assets at December 31,1997. Stockholders' equity increased $5.7 million,
primarily related to net earnings of $9.6 million and transactions related
to stock options of $3.2 million, partially offset by a decrease in
unrealized gains on securities available for sale net of related tax effects
of $4.1 million and dividends declared of $2.9 million.
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, 1998, the Company and subsidiary bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, 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.
<PAGE> 25
The Company's and the subsidiary bank's actual capital amounts and
ratios as of December 31, 1998 and 1997 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, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $75,971 14.42% $42,145 >/=8.00% N/A
Subsidiary Bank $72,961 13.85% $42,145 >/=8.00% $52,681 >/=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $69,379 13.17% $21,072 >/=4.00% N/A
Subsidiary Bank $66,369 12.60% $21,072 >/=4.00% $31,609 >/=6.00%
Tier I Capital (to Average Assets):
Consolidated $69,379 8.18% $33,944 >/=4.00% N/A
Subsidiary Bank $66,369 7.82% $33,944 >/=4.00% $42,430 >/=5.00%
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%
</TABLE>
On August 13, 1996, the Company announced a Stock Repurchase Program
("1996 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 1996 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 1996 Program. No shares were
repurchased under the 1996 Program after March of 1997, and, as a result of
the merger agreement entered into with Primary Bank in April of 1997, the
1996 Program was terminated.
On August 11, 1998, the Company announced a new Stock Repurchase
Program ("1998 Program"), whereby the Company's Board of Directors
authorized the repurchase of up to 5% of its outstanding common shares from
time to time. Any shares repurchased may be held in treasury, retired or
used for general corporate purposes. As of December 31, 1998, 14,700 shares
had been repurchased under the 1998 Program.
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 1998, 1997 and 1996 were $2.3 million, $3.0 million and
$2.0 million, respectively. The primary source of liquidity in the Company
is its interest bearing deposit with its subsidiary bank of $3.9 million at
December 31, 1998. 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
<PAGE> 26
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 other banks, 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,
----------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash and due from banks at beginning of year $ 28,677 $ 30,559 $ 28,811
Operating activities:
Net earnings 9,557 2,307 7,201
Adjustments to reconcile net earnings to net cash provided
by operating activities (1,411) 4,496 175
----------------------------------
Net cash provided by operating activities 8,146 6,803 7,376
Net cash used in investing activities (73,132) (15,609) (67,418)
Net cash provided by financing activities 59,815 6,924 61,790
----------------------------------
Cash and due from banks at end of year $ 23,506 $ 28,677 $ 30,559
==================================
</TABLE>
Operating activities provided positive cash flows in 1998, 1997 and
1996 and were primarily comprised of net earnings and net noncash items
included in earnings which negatively affected cash flows in 1998 and
positively affected cash flows in 1997 and 1996.
Investing activities used cash in 1998, 1997 and 1996. 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 1998, 1997 and 1996, loan originations net of repayments were
$48.9 million, $68.6 million and $41.3 million, respectively. Purchases of
securities available for sale and securities held to maturity were $124.6
million, $154.3 million and $205.6 million, respectively, in 1998, 1997 and
1996. A substantial portion of the net loan originations and purchases of
securities available for sale and securities held to maturity in 1998, 1997
and 1996, were funded by maturities and calls of securities held to maturity
and maturities, calls and sales of securities available for sale in each of
those years, increases in securities sold under agreements to repurchase in
each of those years, increases in other borrowings in 1998 and 1996 and
increases in deposits in 1997 and 1996.
Financing activities provided cash in 1998, 1997 and 1996. 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 1998, 1997 and 1996, deposits increased
by $1.5 million, $39.3 million and $18.5 million, respectively. Securities
sold under agreements to repurchase increased $4.9 million, $1.1 million and
$15.0 million, respectively in 1998, 1997 and 1996. In 1998 and 1996,
proceeds from other borrowings exceeded repayments, which increased other
borrowings by $54.7 million and $30.7 million, respectively, while other
borrowings decreased by $33.3 million in 1997, as repayments exceeded
proceeds of other borrowings. Net cash provided by financing activities in
1998, 1997 and 1996 was used to fund investing activities.
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 $23.5 million at December 31, 1998, the Company through its
subsidiary bank has interest bearing deposits in other banks, primarily with
FHLBB of $19.5 million and securities available for sale of $219.8 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, 1998, the subsidiary bank had $80.6 million of outstanding
borrowings with the FHLBB, with an additional borrowing capacity of
approximately $251.8 million.
The Company anticipates that the subsidiary bank will have sufficient
funds available to meet its current loan commitments. At December 31, 1998,
the subsidiary bank had outstanding loan commitments of $59.1 million. For
additional informa-
<PAGE> 27
tion as to loan commitments, see note 15 of Notes to Consolidated Financial
Statements. Time deposits which are scheduled to mature in one year or less
at December 31, 1998, totaled $226.2 million. Management believes that a
significant portion of such deposits will remain with the subsidiary bank.
For a discussion of the limitations that federal law places on
extensions of credit from banks to their parent holding company, see note 21
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 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Company's adoption of these
accounting pronouncements did not have a material impact on its financial
condition or results of operations.
The Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" an amendment of Financial
Accounting Standards Board ("FASB") Statements Nos. 87, 88, and 106,
effective January 1, 1998. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of costs or obligations under those plans. SFAS
No. 132 requires a reconciliation of both the fair values of plan assets and
of benefit obligations. The Company has made the required disclosures under
SFAS No. 132 for all years presented.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 must be adopted prospectively
and retroactive application is not permitted. SFAS No. 133 will require the
Company to record all derivatives on the balance sheet at fair value.
Changes in derivative fair values will either be recognized in earnings as
offsets to the changes in fair value of related hedged assets, liabilities
and firm commitments or for forecasted transactions, deferred and recorded
as a component of accumulated other comprehensive income in stockholders'
equity until the hedged transactions occur and are recognized in earnings.
The ineffective portion of a hedging derivative's change in fair value will
be immediately recognized in earnings. The Company does not believe the
effect of adopting SFAS No. 133 will have any material effect on its
consolidated financial position or results of operations.
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
December 31, 1998, 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 as of December 31, 1998, allowing adequate
time for any potential modifications in 1999. After December 31, 1998, the
Company will be in the post-implementation phase, which will utilize and
test the contingency plans to enhance back-
<PAGE> 28
up steps and procedures to prepare for worst case scenarios. The Company's
contingency plans are expected to be completed by 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 Boards of Directors with respect
to the Year 2000 committee's efforts. Management's estimate of the costs
related to the Year 2000 compliance are approximately $300,000, of which
approximately $101,000 has been incurred as of December 31, 1998. The
remaining Year 2000 costs are expected to be substantially incurred in the
first two quarters of 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. As of December 31, 1998, no relationships were assessed a
high risk of noncompliance with Year 2000. In the first quarter of 1999, the
Company will review all medium risk borrowing relationships and assess any
exposure, which may exist at that time. 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 December 31, 1998, 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.
<PAGE> 29
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> 30
[FORM OF GRANT THORNTON LETTERHEAD]
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,
1998 and 1997, and the related consolidated statements of earnings,
comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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 consolidated financial statements for the year ended December 31,
1996 reflect the pooling of interests with Primary Bank as described in note
2 of notes to consolidated financial statements. We did not audit the 1996
financial statements of Primary Bank, which statements reflect net interest
and dividend income of $13,479,000 for the year ended December 31, 1996.
Those financial 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 for the year ended December 31, 1996, is based
solely on the report of such 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 the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the 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, 1998 and 1997 and the
results of their operations and their consolidated cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
Boston, Massachusetts
January 11, 1999
<PAGE> 31
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 23,506 $ 28,677
Interest bearing deposits in other banks, at cost, which approximates market value 19,532 27,452
Securities available for sale (amortized cost $217,186,000 in 1998 and $169,373,000 in 1997) 219,765 178,680
Securities held to maturity (market value $22,548,000 in 1998 and $34,170,000 in 1997) 22,277 33,910
Stock in Federal Home Loan Bank of Boston 7,201 7,201
Loans held for sale 1,828 1,068
Loans 555,699 509,165
Less: Unearned income (1,506) (1,432)
Allowance for possible loan losses (7,122) (7,651)
---------------------
Net loans 547,071 500,082
Premises and equipment 17,700 18,863
Other real estate owned 1,601 1,905
Other assets 17,666 15,832
---------------------
Total assets $878,147 $813,670
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Interest bearing deposits $576,778 $577,713
Noninterest bearing deposits 73,709 71,270
---------------------
Total deposits 650,487 648,983
Securities sold under agreements to repurchase 70,905 66,025
Other borrowings 80,608 25,877
Other liabilities 3,547 5,871
---------------------
Total liabilities 805,547 746,756
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; 6,789,582 and 6,493,640
shares issued at December 31, 1998 and 1997, respectively 6,790 6,494
Additional paid-in capital 38,018 34,730
---------------------
44,808 41,224
Retained earnings 32,998 26,389
Accumulated other comprehensive income 1,583 5,713
---------------------
79,389 73,326
Less: Treasury stock, at cost, 889,759 and 920,305 shares at December 31, 1998 and
1997, respectively (6,065) (6,305)
Unallocated common stock acquired by the ESOP (71) (107)
Unearned restricted stock (653)
---------------------
Total stockholders' equity 72,600 66,914
---------------------
Total liabilities and stockholders' equity $878,147 $813,670
=====================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 32
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
($ In Thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income
Loans $ 45,832 $ 42,307 $ 37,969
Debt securities available for sale 9,110 9,771 10,270
Marketable equity securities available for sale 725 586 294
Securities held to maturity 1,469 5,110 4,622
Interest bearing deposits in other banks 1,029 781 857
Dividends on Federal Home Loan Bank of Boston stock 461 456 418
-------------------------------------
Total interest and dividend income 58,626 59,011 54,430
-------------------------------------
Interest expense
Deposits 22,554 23,322 21,999
Securities sold under agreements to repurchase 2,945 2,847 2,438
Other borrowings 2,154 2,731 2,806
-------------------------------------
Total interest expense 27,653 28,900 27,243
-------------------------------------
Net interest and dividend income 30,973 30,111 27,187
Provision for possible loan losses 1,125 2,425 1,372
-------------------------------------
Net interest and dividend income after provision for possible loan losses 29,848 27,686 25,815
Noninterest income
Customer account fees and service charges 2,283 2,969 3,033
Mortgage service fees 566 634 677
Net gains on sales of securities available for sale 4,185 2,187 650
Net gains on sales of loans 725 415 798
Other 1,291 894 573
-------------------------------------
Total noninterest income 9,050 7,099 5,731
Noninterest expense
Salaries and benefits 12,444 13,822 11,036
Occupancy and equipment 4,958 4,197 3,927
Other real estate owned 357 63 (52)
Merger-related charges 34 5,917
Other 6,412 7,775 7,729
-------------------------------------
Total noninterest expense 24,205 31,774 22,640
-------------------------------------
Earnings before income taxes 14,693 3,011 8,906
Income taxes 5,136 704 1,705
-------------------------------------
NET EARNINGS $ 9,557 $ 2,307 $ 7,201
=====================================
Net earnings per share-basic $ 1.64 $ .42 $ 1.35
=====================================
Net earnings per share-diluted $ 1.60 $ .40 $ 1.28
=====================================
Shares used in computing net earnings per share-basic 5,818,856 5,444,350 5,323,480
Shares used in computing net earnings per share-diluted 5,990,745 5,751,262 5,614,554
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 33
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Net earnings $ 9,557 $ 2,307 $7,201
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period (2,543) 9,086 361
Related income tax effects 982 (3,620) (217)
------------------------------
Net unrealized holding gains (losses), net of related income tax effects (1,561) 5,466 144
------------------------------
Less: reclassification adjustment for (gains) losses realized in net earnings:
Realized gains (4,185) (2,187) (650)
Related income tax effects 1,616 845 237
------------------------------
Net reclassification adjustment (2,569) (1,342) (413)
------------------------------
Total other comprehensive income (loss) (4,130) 4,124 (269)
------------------------------
Comprehensive Income $ 5,427 $ 6,431 $6,932
==============================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 34
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated Unallocated
Additional Other Common Unearned
Common Paid-in Retained Treasury Comprehensive Stock Acquired Restricted
Stock Capital Earnings Stock Income by the ESOP Stock Total
------ ---------- -------- -------- ------------- -------------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 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
Net earnings 9,557 9,557
Payment of Employee Stock Ownership
Plan Indebtedness 36 36
Employee Stock Ownership Plan
distribution 97 97
Cash dividends declared on common
stock, $.50 per share (2,948) (2,948)
Change in unrealized gain (loss) on
securities available for sale, net
of income taxes (4,130) (4,130)
Issuance of common stock upon
exercise of stock options, including
related tax effects 296 2,898 3,194
Restricted stock awards 313 421 $(1,015) (281)
Restricted stock award amortization 362 362
Reissuance of common stock from
treasury upon exercise of stock
options (20) 108 88
Purchase of common stock for treasury (289) (289)
------------------------------------------------------------------------------------------
Balance as of December 31, 1998 $6,790 $38,018 $32,998 $(6,065) $ 1,583 $ (71) $ (653) $72,600
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 35
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) in cash and due from banks
Cash flows from operating activities
Net earnings $ 9,557 $ 2,307 $ 7,201
Adjustments to reconcile net earnings to net cash provided by operating activities
Provision for possible loan losses 1,125 2,425 1,372
Provision for depreciation and amortization 2,468 2,329 2,312
Net (accretion) amortization of security discounts and premiums 30 24 (107)
Provision for loss (recovery) on other real estate owned 53 25 (383)
Earned compensation-performance-based stock options 1,078
Deferred income tax benefits (43) (1,243) (133)
Realized gains on sales of securities available for sale, net (4,185) (2,187) (650)
Writedown of premises and equipment 712 1,305
Loans originated for sale (40,082) (26,435) (27,205)
Proceeds from sale of loans originated for sale 40,047 26,807 28,719
(Increase) decrease in other assets 316 3,509 (2,647)
Decrease in other liabilities (1,285) (2,270) (130)
Allocation of common stock by the ESOP 133 36 36
Decrease in unearned restricted stock 362
Realized gains on sales of loans (725) (415) (798)
Gains on sales of other assets (465)
Increase (decrease) in unearned income 74 (428) (62)
Realized (gains) losses on sales of other real estate owned 54 (64) (149)
-------------------------------------
Net cash provided by operating activities 8,146 6,803 7,376
-------------------------------------
Cash flows from investing activities
Proceeds from sales of securities available for sale 5,462 116,531 71,485
Proceeds from maturities and calls of securities available for sale 50,750 52,500 50,948
Principal payments received on securities available for sale 9,596 13,294 7,469
Purchase of securities available for sale (109,586) (147,266) (146,853)
Purchase of securities held to maturity (15,012) (7,000) (58,767)
Proceeds from maturities and calls of securities held to maturity 26,765 33,150 17,814
Principal payments received on securities held to maturity 2,129 4,525
Purchase of Federal Home Loan Bank of Boston stock (836) (150)
Redemption of Federal Home Loan Bank of Boston stock 1,343
Loan originations, net of repayments (48,912) (68,627) (41,275)
Proceeds from sale of loans 17,638
Purchase of premises and equipment (1,533) (2,489) (2,394)
Proceeds from sales of other assets 465
Net (increase) decrease in interest-bearing deposits in other banks 7,920 (9,459) 6,246
Proceeds from sales of other real estate owned 921 2,376 4,752
Other 32 88 (199)
-------------------------------------
Net cash used in investing activities (73,132) (15,609) (67,418)
-------------------------------------
Cash flows from financing activities
Net increase in demand, NOW, money market deposit and savings accounts 24,779 19,865 6,217
Net increase (decrease) in time certificates (23,275) 19,451 12,327
Net increase in securities sold under agreements to repurchase 4,880 1,064 15,003
Increase (decrease) in other borrowings 54,731 (33,313) 30,691
Repayment on liability relating to ESOP (36) (36) (36)
Dividends paid on common stock (2,824) (1,285) (1,083)
Proceeds from issuance of common stock 2,042 1,483 547
Reissuance of common stock from treasury 88
Purchase of common stock for treasury (289) (305) (1,876)
Purchase of common stock relating to restricted stock awards (281)
-------------------------------------
Net cash provided by financing activities 59,815 6,924 61,790
-------------------------------------
Net increase (decrease) in cash and due from banks (5,171) (1,882) 1,748
Cash and due from banks at beginning of year 28,677 30,559 28,811
-------------------------------------
Cash and due from banks at end of year $ 23,506 $ 28,677 $ 30,559
=====================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 36
Notes to Consolidated Financial Statements
NOTE 1-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 nineteen full service offices and an additional twenty
one 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. In connection with the determination of the allowance for possible
loan losses, management obtains independent appraisals for significant
properties which collateralize loans.
A substantial portion of the Company's loans are secured by real
estate in New Hampshire. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio is susceptible to
changing conditions in New Hampshire.
The following is a description of the significant accounting policies.
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.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform to the 1998 presentation.
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 in accumulated other comprehensive income as a
separate component of stockholders' equity, net of estimated income taxes.
During 1998, 1997 and 1996, 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 securities available for sale are recognized at the time of sale on
a specific identification basis.
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
<PAGE> 37
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, certain direct loan origination
costs and discounts on acquired loans are being deferred and amortized as an
adjustment of the related loan yield over the contractual life of the loans.
Allowance for Possible Loan Losses
The adequacy of the allowance for possible loan losses is evaluated on
a regular basis by management. 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, including
trends in nonperforming loans expected to result from changes in existing
conditions; historical loan charge-off experience; and the results of bank
regulatory examinations.
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.
Mortgage Loans Held For Sale
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.
The Company recognizes 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 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.
Purchased and originated loan servicing rights are amortized on a
basis which results in approximately level rates of return in proportion to,
and over the period of, estimated net servicing income.
On a quarterly basis, the Company assesses the carrying values of
originated and purchased mortgage servicing rights for impairment based on
the fair value of such rights. A valuation model that calculates the present
value of future cash flows is used to estimate such fair value. This
valuation model incorporates assumptions that market participants would use
in estimating future net servicing income including estimates of the cost of
servicing loans, discount rate, float value, ancillary income, prepayment
speeds and default rates. Any impairment is recognized as a charge to
earnings through a valuation allowance.
<PAGE> 38
During 1997 the Company prospectively adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," as
required by the Financial Accounting Standards Board ("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.
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.
The Company reviews for impairment of long-lived assets, certain
identifiable intangibles and goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
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.
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.
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.
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 23 of Notes to Consolidated
Financial Statements.
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and the respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under the asset and liability method, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
that includes the enactment date.
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 adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" an amendment of FASB Statements
Nos. 87, 88 and 106, effective January 1, 1998. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans.
It does not change the measurement or recognition of costs or obligations
under those plans. SFAS No. 132 requires a reconciliation of both the fair
values of plan assets and of benefit obligations. The Company has made the
required disclosures under SFAS No. 132 for all years presented.
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.
<PAGE> 39
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.
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.
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.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income",
effective January 1, 1998. SFAS No. 130 establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains and
losses). Components of comprehensive income are net earnings and all other
non-owner changes in equity. SFAS No. 130 requires that an enterprise (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. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required. The Company's accumulated other comprehensive income included
in stockholders' equity is comprised exclusively of net unrealized gains on
securities available for sale, net of related tax effects.
The Company has chosen to disclose comprehensive income in a separate
statement of comprehensive income.
Disclosure about Segments
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", effective January 1, 1998. SFAS No.
131 establishes standards for reporting information about segments in annual
and interim financial statements. SFAS No. 131 introduces a new model for
segment reporting called the "management approach". The management approach
is based on the way the chief operating decision-makers organize segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure and any other manner in which management
disaggregates a company. Based on the "management approach" model, the
Company has determined that its business is comprised of a single operating
segment and that SFAS No. 131 has no impact on its financial statements.
Recent Accounting Developments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 must be adopted prospectively
and retroactive application is not permitted. SFAS No. 133 will require the
Company to record all derivatives on the balance sheet at fair value.
Changes in derivative fair values will either be recognized in earnings as
offsets to the changes in fair value of related hedged assets, liabilities
and firm commitments or for forecasted transactions, deferred and recorded
as a component of accumulated other comprehensive
<PAGE> 40
income in stockholders' equity until the hedged transactions occur and are
recognized in earnings. The ineffective portion of a hedging derivative's
change in fair value will be immediately recognized in earnings. The Company
does not believe the effect of adopting SFAS No. 133 will have any material
effect on its consolidated financial position or results of operations.
NOTE 2-Mergers and Acquisitions
Effective after the close of business October 31, 1997, the Company
completed its merger with Primary Bank, which was accounted for under the
pooling-of-interests method. Accordingly, the consolidated financial
statements of the Company have been restated to reflect the acquistion at
the beginning of each period presented. In connection with the merger, each
share of Primary Bank's common stock was 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.
Expenses directly attributable to the merger during the years ending
December 31, 1998 and 1997 amounted to $34,000 and $5,917,000, respectively.
The 1997 charges were recorded at the date of combination and 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. The 1998 charges were
insignificant.
The following table presents a summary of activity in 1998 and 1997
with respect to the merger accrual:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Balance at beginning of year $1,613 $ 0
Provision charged against earnings 34 5,917
Cash outlays 1,647 2,999
Non-cash writedowns 1,305
-----------------
Balance at end of year $ 0 $1,613
=================
</TABLE>
NOTE 3-Earnings Per Share
Information regarding the computations of earnings per share is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
($ in Thousands, except per share data)
<S> <C> <C> <C>
Net earnings $ 9,557 $ 2,307 $ 7,201
=====================================
Weighted average common
shares outstanding-Basic 5,818,856 5,444,350 5,323,480
Dilutive effect of stock
options computed using
the treasury stock method 171,889 306,912 291,074
-------------------------------------
Weighted average common
shares outstanding-Diluted 5,990,745 5,751,262 5,614,554
=====================================
Net earnings per share-
basic $1.64 $.42 $1.35
=====================================
Net earnings per share-
diluted $1.60 $.40 $1.28
=====================================
</TABLE>
Weighted average options to purchase 37,808 and 109,363 shares of
common stock were outstanding at December 31, 1998 and 1996, 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. All options to purchase shares of
common stock outstanding at December 31, 1997 were included in the
computation of weighted average common shares outstanding for purposes of
computing diluted earnings per share.
NOTE 4-Supplemental Cash Flow Disclosures
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash paid for
Interest $27,400 $29,010 $27,143
Income taxes 3,924 2,500 1,650
</TABLE>
<PAGE> 41
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 $724,000, $732,000 and $2,933,000
during the years ended December 31, 1998, 1997 and 1996, respectively.
Dividends declared and unpaid on common stock at December 31, 1998,
1997 and 1996 were $737,000, $613,000 and $277,000, respectively.
NOTE 5-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, 1998 was approximately $9,678,000.
NOTE 6-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, 1998
US Government agency obligations $ 17,265 $ 230 $ 17,495
Other corporate obligations 5,012 41 5,053
----------------------------------------------------
Total securities held to maturity $ 22,277 $ 271 $ 0 $ 22,548
====================================================
Securities available for sale
At December 31, 1998
US Treasury obligations $ 82,521 $1,195 $ 83,716
US Government agency obligations 55,961 112 $ 75 55,998
Other corporate obligations 46,593 150 286 46,457
Mortgage-backed securities:
FNMA 7,045 35 49 7,031
FHLMC 2,876 2 25 2,853
GNMA 1,190 59 3 1,246
SBA 552 16 568
----------------------------------------------------
Total mortgage-backed securities 11,663 112 77 11,698
Mutual Funds 6,326 105 29 6,402
Marketable equity securities 14,122 2,785 1,413 15,494
----------------------------------------------------
Total securities available for sale $217,186 $4,459 $1,880 $219,765
====================================================
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
====================================================
</TABLE>
<PAGE> 42
In the fourth quarter of 1997, the acquisition of Primary Bank (see
Note 2-"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, 1998 and 1997, the subsidiary bank had investments in
FHLBB stock of $7,201,000. 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>
1998 1997 1996
--------------------- --------------------- ---------------------
Realized Realized Realized Realized Realized Realized
Gain Loss Gain Loss Gain Loss
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities
Debt securities $ 23 $ 166 $1,018 $212 $324
Marketable equity securities 4,162 3,039 767 5
----------------------------------------------------------------------
$4,185 $ 0 $3,205 $1,018 $979 $329
======================================================================
</TABLE>
<PAGE> 43
At December 31, 1998, U. S. Treasury and U. S. Government Agency
Obligations with carrying values of $89,873,000 and estimated market values
of $90,033,000 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, 1998. 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, 1998
Securities held to maturity
US Government agency obligations $17,265 $ 17,265
Other corporate obligations 5,012 5,012
------------------------------------------------------------------
Total debt securities held to maturity $ 0 $ 0 $22,277 $ 0 $ 22,277
==================================================================
Securities available for sale
US Treasury obligations $49,980 $ 32,541 $ 82,521
US Government agency obligations 54,961 $ 1,000 55,961
Other corporate obligations 28,087 13,135 $ 5,371 46,593
Mortgage-backed securities 16 143 1,179 10,325 11,663
------------------------------------------------------------------
Total debt securities available for sale $49,996 $115,732 $15,314 $15,696 $196,738
==================================================================
Estimated Market Value
At December 31, 1998
Securities held to maturity
US Government agency obligations $17,495 $ 17,495
Other corporate obligations 5,053 5,053
------------------------------------------------------------------
Total debt securities held to maturity $ 0 $ 0 $22,548 $ 0 $ 22,548
==================================================================
Securities available for sale
US Treasury obligations $50,312 $ 33,404 $ 83,716
US Government agency obligations 55,000 $ 998 55,998
Other corporate obligations 28,092 12,969 $ 5,396 46,457
Mortgage-backed securities 16 145 1,195 10,342 11,698
------------------------------------------------------------------
Total debt securities available for sale $50,328 $116,641 $15,162 $15,738 $197,869
==================================================================
</TABLE>
<PAGE> 44
NOTE 7-Loans
Loans consist of the following at:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Commercial, financial and
agricultural $ 48,418 $ 68,513
Real estate-residential 328,243 245,577
Real estate-commercial 146,093 151,474
Real estate-construction
and land development 2,281 6,000
Installment 7,809 11,588
Other 22,855 26,013
---------------------
Total loans 555,699 509,165
Less:
Unearned income (1,506) (1,432)
Allowance for possible loan
losses (7,122) (7,651)
---------------------
Net loans $547,071 $500,082
=====================
</TABLE>
At December 31, 1998 and 1997, loans which were on nonaccrual status
were $3,013,000 and $7,145,000, 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, 1998, 1997
and 1996, was $441,000, $767,000 and $679,000, respectively. Interest income
recognized on nonaccrual loans in 1998, 1997 and 1996 amounted to $145,000,
$413,000 and $188,000, 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 $1,556,000 and $4,559,000, respectively, at December 31,
1998 and 1997. The average recorded investment in impaired loans was
$3,502,000, $3,001,000 and $3,933,000, respectively, in 1998, 1997 and 1996.
No income was recognized on impaired loans during 1998 and 1997 and $4,000
of income was recognized during 1996. Total cash collected on impaired loans
during 1998, 1997 and 1996 was $710,000, $779,000 and $2,427,000,
respectively, of which $710,000, $779,000 and $2,423,000, respectively, was
credited to the principal balance outstanding on such loans.
Changes in the allowance for possible loan losses allocated to
impaired loans, which is included in the allowance for possible loan losses
(see Note 8), are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of
year $ 1,054 $ 457 $ 1,114
Provision for possible
loan losses 201 983 499
Loans charged off (1,022) (386) (1,156)
------------------------------
Balance at end of year $ 233 $1,054 $ 457
==============================
</TABLE>
At December 31, 1998 and 1997, there were no impaired loans which did
not have an allowance for possible loan losses determined in accordance with
SFAS No. 114.
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.
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, 1998 and 1997, the subsidiary bank serviced real
estate loans sold to others in the amounts of $148,024,000 and $163,943,000,
respectively.
<PAGE> 45
NOTE 8-Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 7,651 $ 6,253 $ 7,151
Provision for possible loan
losses 1,125 2,425 1,372
Loans charged off (2,113) (1,205) (3,020)
Recoveries of loans previously
charged off 459 178 750
-------------------------------
Balance at end of year $ 7,122 $ 7,651 $ 6,253
===============================
</TABLE>
NOTE 9-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 $9,622,000 and $6,864,000 at December 31, 1998 and
1997, respectively. During 1998, $6,436,000 of new loans were made and
repayments totaled $3,678,000.
NOTE 10-Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Bank buildings $15,496 $16,082
Leasehold improvements 1,697 1,808
Furniture and equipment 11,077 10,155
-------------------
28,270 28,045
Less: Accumulated depre-
ciation and amortization 13,528 11,972
-------------------
14,742 16,073
Land 2,791 2,785
Construction in progress 167 5
-------------------
$17,700 $18,863
===================
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 was $1,994,000, $1,911,000 and $1,889,000,
respectively.
For the year ended December 31, 1998, the Company recorded a $712,000
writedown on bank buildings based upon an appraisal performed on property
used as a branch office which is being closed. The charge to earnings is
reflected in occupancy and equipment expense.
NOTE 11-Other Real Estate Owned
A summary of other real estate owned follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Condominiums and apartment projects $ 131 $ 371
Single family housing projects 739 792
Non-retail commercial 756 773
Residential 451 437
-----------------
2,077 2,373
Less:Valuation allowance 476 468
-----------------
$1,601 $1,905
=================
</TABLE>
An analysis of other real estate owned follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,905 $ 3,492 $ 4,779
Other real estate owned
acquired 724 732 2,933
Advances for construction
and other 18
Sales proceeds (921) (2,376) (4,752)
Gains (losses) on sales, net (54) 64 149
Provisions for (loss) recovery
subsequent to foreclosure (53) (25) 383
------------------------------
Balance at end of year $1,601 $1,905 $3,492
==============================
</TABLE>
An analysis of other real estate owned expense follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Foreclosure and holding costs, net $250 $102 $ 480
Provision for loss (recovery)
subsequent to foreclosure 53 25 (383)
(Gains) losses on sales, net 54 (64) (149)
-----------------------
$357 $ 63 $ (52)
=======================
</TABLE>
<PAGE> 46
Changes in the valuation allowance for other real estate owned were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $468 $528 $1,605
Provision for loss (recovery) 53 25 (383)
Charge offs, net (45) (85) (694)
------------------------
Balance at end of year $476 $468 $ 528
========================
</TABLE>
NOTE 12-Other Assets
Goodwill and mortgage servicing rights included in other assets at
December 31, consisted of the following:
<TABLE>
<CAPTION>
1998
------------------------------------
Net
Original Accumulated Book
Amount Amortization Value
-------- ------------ -----
(In Thousands)
<S> <C> <C> <C>
Goodwill $3,682 $2,044 $1,638
===================================
Mortgage servicing rights $1,377 $ 987 $ 390
===================================
<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
===================================
</TABLE>
Mortgage servicing rights of $262,000, $114,000 and $257,000, were
capitalized during 1998, 1997 and 1996.
Amortization expense for the years ended December 31, 1998, 1997 and
1996 was $474,000, $418,000 and $423,000, respectively and included
amortization on mortgage servicing rights of $203,000, $118,000 and $109,000
in 1998, 1997 and 1996, respectively.
NOTE 13-Interest Bearing Deposits
Interest bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
NOW accounts $203,068 $166,773
Savings accounts 87,150 89,278
Money market deposit accounts 19,659 31,486
Time certificates 266,901 290,176
---------------------
$576,778 $577,713
=====================
</TABLE>
Maturities of time certificates after December 31, 1998 are
$226,150,000 in 1999, $25,272,000 in 2000, $8,949,000 in 2001, $3,751,000 in
2002, $2,467,000 in 2003 and $312,000 in years thereafter.
Time certificates with balances of $100,000 or more at December 31,
1998 and 1997 totaled $33,545,000 and $37,360,000, respectively.
NOTE 14-Borrowings
Securities Sold Under Agreements to Repurchase
Short-term borrowings in the form of securities sold under agreements
to repurchase at December 31, 1998 and 1997, totaled $70,905,000 and
$66,025,000, respectively. Such borrowings were collateralized at December
31, 1998 by a portion of the Company's U.S. Treasury and U.S. Government
agency securities with a carrying value of $87,348,000 and estimated market
value of $87,467,000 (see note 6). The collateral is maintained under the
control of the Company in a separate custodial account at the Federal Home
Loan Bank of Boston. The weighted average interest rate on those borrowings
was 4.29% and 5.07%, respectively, at December 31, 1998 and 1997.
The maximum amount of securities sold under agreements to repurchase
at any month end during 1998, 1997 and 1996, were $73,392,000, $67,693,000
and $64,961,000, respectively. The average amount of securities sold under
agreements to repurchase in 1998, 1997 and 1996 were $67,562,000,
$59,826,000 and $51,220,000, respectively. The average cost of securities
sold under agreements to repurchase was 4.36%, 4.76% and 4.76% during 1998,
1997 and 1996, 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
<PAGE> 47
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, 1998 and 1997.
Based upon "qualifying" collateral held, the Company's subsidiary bank
had a total borrowing capacity with the FHLBB as of December 31, 1998 of
approximately $332,456,000, of which approximately $251,848,000 was still
available.
Other borrowings, all of which were with the FHLBB, consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1998
---------------------
Range of
Amount Rates (%)
------ ---------
($ In Thousands)
<S> <C> <C>
Due within one year $ 45 5.00-6.17
Due from one to three years 99 5.00-6.17
Due over three years 80,464 4.18-6.17
-------
$80,608
=======
<CAPTION>
December 31, 1997
---------------------
Range of
Amount Rates (%)
------ ---------
($ 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
=======
</TABLE>
Principal payments due on other borrowings after December 31, 1998 are
$45,000 in 1999, $48,000 in 2000, $51,000 in 2001, $55,000 in 2002,
$30,057,000 in 2003 and $50,352,000 in years thereafter. The FHLBB has the
right to call and require the repayment of $20,000,000 of borrowings at an
interest rate of 4.49% due in 2008 during 2001. Additionally, the FHLBB has
the right to call and require the repayment of $20,000,000 of borrowings at
an interest rate of 4.18% due in 2013 during 2000.
NOTE 15-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, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
-------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Financial instruments whose con-
tract amounts represent credit risk
Commitments to originate loans $18,886 $16,673
Unused lines and standby letters
of credit 38,490 46,263
Unadvanced portions of construc-
tion loans 1,767 1,110
</TABLE>
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based upon management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
<PAGE> 48
Derivative Financial Instruments
In 1997, the Company began using interest rate cap agreements in
managing the interest rate risk included in the consolidated statement of
financial condition.
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 $325,000
and $384,000 at December 31, 1998 and 1997, respectively. 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 1998 and 1997.
At December 31, 1998 and 1997 the Company had the following interest
rate cap agreements in effect:
<TABLE>
<CAPTION>
Notional Strike Maturity
Amount Rate Date
-------- ------ --------
(In Thousands)
<C> <C> <C>
$ 5,000 7.50% 2/7/04
5,000 7.8125% 6/4/04
10,000 7.875% 11/15/04
</TABLE>
There were no interest rate cap agreements in effect at December 31,
1996.
Investment in Limited Partnerships
At December 31, 1998, the subsidiary bank was committed to invest an
additional $1,254,000 in two real estate development limited partnerships
related to low income housing. The investments will be $219,000 in 1999,
$208,000 in 2000, $198,000 in 2001, $187,000 in 2002, $177,000 in 2003 and
$265,000 thereafter. At December 31, 1998 and 1997, the Company had $400,000
and $85,000, respectively, invested in such partnerships, which are included
in other assets in the consolidated statements of financial condition.
Lease Commitments
As of December 31, 1998, the Company was obligated under noncancelable
operating leases for premises. Minimum future rentals under leases are as
follows:
<TABLE>
<CAPTION>
Amount
------
(In Thousands)
<C> <C>
Year Ending December 31,
1999 $ 469
2000 388
2001 243
2002 197
2003 190
Thereafter 1,060
------
$2,547
======
</TABLE>
Rent expense amounted to $537,000, $510,000 and $519,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Employment and Special Termination Agreements
The subsidiary bank and the Company have entered into an employment
agreement with a senior officer, which provides for a specified minimum
annual compensation, certain lump sum severance payments following a "change
in control" as defined in the agreement and 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.
NOTE 16-Income Taxes
The Company and its subsidiary file a consolidated Federal income tax
return on the accrual basis for taxable years ending December 31.
<PAGE> 49
Income tax expense (benefit) reflected in the consolidated statements
of earnings for years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Federal:
Current $4,476 $ 1,947 $ 1,693
Deferred 341 34 1,296
Effect of change in
valuation allowance (1,277) (1,429)
State:
Current 703 145
Deferred (384)
------------------------------
$5,136 $ 704 $ 1,705
==============================
</TABLE>
The above amounts include a tax provision on securities transactions
of $1,616,000, $845,000 and $237,000, in 1998, 1997 and 1996, 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 $1,152,000 in 1998, $290,000 in 1997 and $126,000
in 1996.
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>
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Computed "expected" Federal
income tax expense at
statutory rate $4,996 $ 1,024 $ 3,028
Increase (decrease)
resulting from:
State income tax, net of
Federal tax benefit 211 96
Performance based stock
options 367
Nondeductible merger-
related charges 611
Change in valuation
allowance (1,277) (1,429)
Change in base year reserve (43)
Other (71) (21) 53
------------------------------
$5,136 $ 704 $ 1,705
==============================
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $2,428 $1,649
Other real estate owned 74 55
Federal and state net operating loss
carryforwards 580 1,509
Tax credit carryforwards 218
Accrued interest 132 62
Core deposit intangibles 101 109
Deferred compensation 65 159
Marketable equity securities 49 101
Other 153
-----------------
3,582 3,862
Less: Valuation allowance 0 0
-----------------
Total deferred tax assets 3,582 3,862
-----------------
Deferred tax liabilities:
Unearned income 674 570
Premises and equipment 260
Deferred loan fees 140 185
Unrealized gains on securities
available for sale 996 3,594
Other 71 193
-----------------
Total deferred tax liabilities 1,881 4,802
-----------------
Net deferred tax asset (liability) $1,701 $ (940)
=================
</TABLE>
At December 31, 1998 and 1997, net deferred tax assets (liabilities)
includes $996,000 and $3,594,000, 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, 1998 the Company has net operating loss
carryforwards available for tax purposes of approximately $1,707,000, 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 $426,000 of these net operating loss
carryforwards are available for use by the Company in 1999.
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 deferred tax assets will not be realized. In
1996 and prior years, management believed that uncertainty existed with
respect to future realization of a portion of its net operating loss
carryforwards and had estab-
<PAGE> 50
lished 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. There was no valuation allowance
on deferred tax assets at December 31, 1998 or 1997.
NOTE 17-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, 1998 and 1997 (the most
recent actuarial valuations):
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$2,425,000 and $2,074,000,
respectively $2,502 $2,178
=================
Projected benefit obligation, beginning of
period $2,800 $2,458
Service costs - benefits earned during
the period 176 151
Interest cost on projected benefit
obligation 194 184
Actuarial loss recognized during the
period 187 88
Annuity payments made during the
period (76) (74)
Settlements occurring during the
period (64) (7)
-----------------
Projected benefit obligation, end of period $3,217 $2,800
-----------------
Plan assets at fair value, beginning of
period, primarily fixed income and equity
securities $3,221 $2,662
Return on plan assets during the
period 44 515
Employer contributions during the
period 42 125
Annuity payments made during the
period (76) (74)
Settlements occurring during the period (64) (7)
-----------------
Plan assets at fair value, end of period,
primarily fixed income and equity
securities $3,167 $3,221
-----------------
Plan assets in excess of (less than)
projected benefit obligation $ (50) $ 421
Unrecognized net gain from past
experience different from that
assumed and effects of changes in
assumptions (389) (841)
Unrecognized net liability being
recognized over approximately
12 years 134 190
-----------------
Accrued pension cost $ (305) $ (230)
=================
</TABLE>
Net periodic pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service cost-benefits earned during
the period $ 176 $ 151 $ 144
Interest cost on projected benefit
obligation 194 184 171
Expected return on plan assets (254) (217) (186)
Net amortization and deferral 2 18 32
-------------------------
Net periodic pension expense $ 118 $ 136 $ 161
=========================
</TABLE>
The weighted average discount rate of 6.50% in 1998, 7.25% in 1997 and
7.75% in 1996, and the rate of increase in future compensation levels of
4.50% in 1998, 5.00% in 1997 and 5.50% in 1996, 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 these life insurance policies was $1,430,000 and
$1,360,000 at December 31, 1998 and 1997, 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, 1998, 1997 and
1996 amounted to $257,000, $257,000 and $176,000, respectively.
<PAGE> 51
NOTE 18-Employee Stock Ownership Plan (ESOP)
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 is guaranteed by
the Company. Annual principal payments are approximately $36,000 with
interest at approximately 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 $9,000, $17,000 and
$19,000, respectively, for the years ended December 31, 1998, 1997 and 1996.
Compensation expense related to the ESOP amounted to $308,000,
$321,000 and $251,000, respectively, for the years ended December 31, 1998,
1997 and 1996 and included additional contributions in excess of amounts
required to service the ESOP debt of $175,000 in each of those years.
Dividends on unallocated shares were insignificant during 1998, 1997
and 1996.
The total shares held by the ESOP were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Allocated shares 322,448 308,807
Unallocated shares 11,314 16,961
-------------------
Total ESOP shares 333,762 325,768
===================
</TABLE>
The fair value of unallocated shares at December 31, 1998 and 1997 was
$266,000 and $454,000, respectively. Unallocated shares are allocated to
employees as the ESOP debt is repaid.
NOTE 19-Stock Compensation Plans
The Company maintains the 1997 Long-Term Incentive Stock Benefit Plan.
Under this plan, stock options have been granted to certain officers of the
Company and its subsidiary bank. Under this plan, stock options have also
been granted to each member of the Board of Directors who is not an officer
or employee of the Company or the subsidiary bank. Options have been granted
to certain officers and still remain outstanding under the Company's 1986
stock option plan and stock options are still outstanding that relate to
plans adopted by Primary Bank in 1993 and 1995, which plans were assumed by
the Company in connection with the acquisition of Primary Bank.
Additionally, stock options granted to members of the Board of Directors of
Primary Bank, are still outstanding under plans adopted by Primary Bank in
1993 and 1995, which plans were assumed by the Company in connection with
the acquisition of Primary 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 or Director terminates their employment or
service due to death, disability, normal retirement, or in the event of a
change in control.
The following is a description of activity in the stock compensation
plans for the years ended December 31, 1998, 1997 and 1996:
<PAGE> 52
Fixed Stock Option Plans
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Option Price Options Option Price Options Option Price
--------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of year 584,600 $11.39 490,331 $ 5.80 576,049 $5.52
Granted 195,250 19.64 283,918 16.93 9,118 7.48
Exercised (257,880) 6.26 (189,024) 5.20 (93,909) 4.25
Canceled (1,502) 8.91 (625) 9.90 (927) 8.09
-------- -------- -------
Options at end of year 520,468 $17.06 584,600 $11.39 490,331 $5.80
======== ====== ======== ====== ======= =====
Options exercisable at year end 82,861 $11.13 305,600 $ 6.28 426,225 $5.30
======== ====== ======== ====== ======= =====
<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 16,500 3.3 $ 3.33 16,500 $ 3.33
$6.33 to $7.52 17,578 5.0 6.72 17,578 6.72
$8.12 to $9.10 6,160 6.5 8.82 6,160 8.82
$11.09 to $11.41 4,498 6.8 11.40 4,498 11.40
$13.93 1,482 8.0 13.93 1,482 13.93
$17.00 399,250 8.8 17.00 36,643 17.00
$23.88 75,000 9.0 23.88
------- ------
$3.33 to $23.88 520,468 8.4 $17.06 82,861 $11.13
======= === ====== ====== ======
</TABLE>
Performance-Based Stock Option Plans
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Option Price Options Option Price Options Option Price
--------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of year 66,787 $11.09 103,616 $11.06 47,023 $11.40
Granted 56,593 10.78
Exercised (46,809) 11.02 (36,331) 11.01
Canceled (472) 10.82 (498) 10.78
------- ------- -------
Options at end of year 19,506 $11.23 66,787 $11.09 103,616 $11.06
======= ====== ======= ====== ======= ======
Options exercisable at year end 19,506 $11.23 66,787 $11.09 0 N/A
======= ====== ======= ====== ======= ======
</TABLE>
<PAGE> 53
The range of exercise prices for the performance-based stock option
plans are $10.78-$11.40, with a remaining weighted average life of 7.1 years
at December 31, 1998.
Under the 1995 Stock Option Plan for Outside Directors and the 1995
Stock Option Plan for Officers, which options were assumed by the Company in
connection with the acquisition of Primary Bank (the "Performance-Based
Stock Options"), 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
Options, the Company recorded compensation expense of $1,078,000 in 1997.
The offsetting entry relating to this expense was credited to additional
paid-in capital.
The weighted average fair values of options at their grant date during
1998, 1997 and 1996, were $8.64, $6.55 and $5.00 per option share,
respectively. The fair values of the share grants were estimated on the date
of grant using the Black-Scholes option-pricing model using the following
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected option lives 7 years 7.5 years 7 years
Expected volatility 37 - 48% 39% 40%
Risk free interest rate 4.99 - 5.49% 6.96% 6.10%
Expected dividend yield 2.10% 1.74% N/A
</TABLE>
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123 for awards made after July 1,
1995, the Company's net earnings and net earnings per share would have been
reduced to the pro forma amounts indicated below for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
($ In Thousands, except
per share data)
<S> <S> <C> <C> <C>
Net Earnings As Reported $9,557 $2,307 $7,201
Pro forma $8,370 $2,070 $6,888
Net Earnings
Per Share:
Basic As Reported $ 1.64 $ .42 $ 1.35
Pro forma $ 1.44 $ .38 $ 1.29
Diluted As Reported $ 1.60 $ .40 $ 1.28
Pro forma $ 1.40 $ .36 $ 1.23
</TABLE>
In 1998, 46,500 shares of restricted stock were awarded to certain
officers under the 1997 Long-Term Incentive Stock Benefit Plan with a
weighted average fair value at the dates of grant of $21.83 per share. At
December 31, 1998, restricted stock awards totaled 46,500 shares of which
6,500 shares were vested. Shares vest ratably over a period of five years.
Compensation expense applicable to the stock awards was $362,000 in 1998.
NOTE 20-Stockholders' Equity
Capital Requirements
The Company and the subsidiary bank are subject to various regulatory
capital requirements administered by federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the subsidiary bank must meet
specific capital guidelines that involve quantitative measures of their
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and 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, 1998, the Company and the subsidiary bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, 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, 1998 and 1997 are presented in the following
table.
<PAGE> 54
<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, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $75,971 14.42% $42,145 >/=8.00% N/A
Subsidiary Bank $72,961 13.85% $42,145 >/=8.00% $52,681 >/=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $69,379 13.17% $21,072 >/=4.00% N/A
Subsidiary Bank $66,369 12.60% $21,072 >/=4.00% $31,609 >/=6.00%
Tier I Capital (to Average Assets):
Consolidated $69,379 8.18% $33,944 >/=4.00% N/A
Subsidiary Bank $66,369 7.82% $33,944 >/=4.00% $42,430 >/=5.00%
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%
</TABLE>
Stock Repurchase Program
On August 13, 1996, the Company announced a Stock Repurchase Program
("1996 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 1996 Program may be held in treasury, retired
or used for general corporate purposes. The Company had repurchased 72,549
shares under the 1996 Program. No shares were repurchased under the 1996
Program after March of 1997, and, as a result of the merger agreement
entered into with Primary Bank in April of 1997 (see note 2 of notes to
consolidated financial statements), the Stock Repurchase Program was
terminated.
On August 11, 1998, the Company announced a new Stock Repurchase
Program ("1998 Program"), whereby the Company's Board of Directors
authorized the repurchase of up to 5% of its outstanding common shares from
time to time. Any shares repurchased may be held in treasury, retired or
used for general corporate purposes. As of December 31, 1998, 14,700 shares
had been repurchased under the 1998 Program.
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 liquidation 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
<PAGE> 55
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, 1998 was approximately
$1,958,000 (unaudited).
NOTE 21-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, 1998 and 1997, no such transactions existed
between the Company and the subsidiary bank.
NOTE 22-Other Noninterest Expense
Components of other noninterest expense were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Advertising and marketing $ 567 $1,210 $1,026
Amortization 474 418 423
Data processing 487 1,101 1,438
FDIC deposit insurance
assessments 93 82 118
FDIC special assessment to
recapitalize Savings
Association Insurance Fund 187
Postage and freight 576 552 542
Professional fees 856 817 791
Printing and supplies 640 726 570
Telephone 552 433 383
Other 2,167 2,436 2,251
----------------------------
$6,412 $7,775 $7,729
============================
</TABLE>
NOTE 23-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 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 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 and due from banks and interest bearing deposits in other banks
For cash and due from banks and short term investments in interest
bearing deposits in other banks, 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.
<PAGE> 56
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, 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 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, 1998 and
1997, 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.
<PAGE> 57
The following presents the carrying value and estimated fair value of
the Company's financial instruments at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997
---------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 23,506 $ 23,506 $ 28,677 $ 28,677
Interest bearing deposits in other banks 19,532 19,532 27,452 27,452
Securities held to maturity 22,277 22,548 33,910 34,170
Stock in Federal Home Loan Bank of Boston 7,201 7,201 7,201 7,201
Securities available for sale 219,765 219,765 178,680 178,680
Net loans 547,071 554,886 500,082 506,317
Loans held for sale 1,828 1,828 1,068 1,068
Mortgage servicing rights 390 643 331 679
Accrued interest receivable 5,722 5,722 5,627 5,627
Financial Liabilities
Deposits (with no stated maturity) 383,586 383,586 358,807 358,807
Time deposits 266,901 269,129 290,176 290,772
Securities sold under agreements to repurchase 70,905 70,905 66,025 66,025
Other borrowings 80,608 80,579 25,877 25,883
Accrued interest payable 1,288 1,288 1,032 1,032
<CAPTION>
Contractual Estimated Contractual Estimated
or Notional Fair or Notional Fair
Amount Value Amount Value
----------- --------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Off-balance sheet instruments
Commitments to extend credit $ 59,143 $ 0 $ 64,046 $ 0
Interest rate cap agreements 20,000 122 20,000 242
</TABLE>
<PAGE> 58
NOTE 24-Condensed Parent Company Only Financial Information
Condensed financial statements of Granite State Bankshares, Inc. (the
"Parent Company"), as of December 31, 1998 and 1997, and for the years ended
December 31, 1998, 1997 and 1996, are as follows:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Assets
Interest bearing deposits in subsidiary bank $ 3,948 $ 2,500
Investment in subsidiary bank, at equity 69,590 65,070
Other assets 3 70
------------------
$73,541 $67,640
==================
Liabilities $ 941 $ 726
Stockholders' equity 72,600 66,914
------------------
$73,541 $67,640
==================
</TABLE>
<TABLE>
<CAPTION>
Statements of Earnings
Year Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenues
Interest income from subsidiary bank $ 83 $ 29 $ 20
Dividend income from subsidiary bank 2,250 3,000 2,000
Other revenues 465
----------------------------
Total revenues 2,798 3,029 2,020
Operating expenses 83 254 20
----------------------------
Earnings before income taxes and equity in undistributed earnings (loss) of subsidiary bank 2,715 2,775 2,000
Income tax expense (benefit) 161 (68)
----------------------------
Earnings before equity in undistributed earnings (loss) of subsidiary bank 2,554 2,843 2,000
Equity in undistributed earnings (loss) of subsidiary bank 7,003 (536) 5,201
----------------------------
Net earnings $9,557 $ 2,307 $ 7,201
============================
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
Statements of Cash Flows
Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 9,557 $ 2,307 $ 7,201
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiary bank (7,003) 536 (5,201)
Gains on sales of other assets (465)
(Increase) decrease in other assets (1) 228 1
Increase (decrease) in other liabilities 127 (22) (7)
Deferred income tax expense (benefit) 68 (68)
-------------------------------
Net cash provided by operating activities 2,283 2,981 1,994
-------------------------------
Cash flows from investing activities:
(Increase) decrease in interest bearing deposits with subsidiary bank (1,448) (1,781) 748
Proceeds from sales of other assets 465
-------------------------------
Net cash provided by (used in) investing activities (983) (1,781) 748
-------------------------------
Cash flows from financing activities:
Dividends paid on common stock (2,824) (1,285) (1,083)
Proceeds from issuance of common stock 2,042 426 253
Reissuance of common stock from treasury 88
Purchase of common stock for treasury (289) (305) (1,876)
Repayment on liability relating to ESOP (36) (36) (36)
Purchase of common stock relating to restricted stock awards (281)
-------------------------------
Net cash used in financing activities (1,300) (1,200) (2,742)
-------------------------------
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> 60
NOTE 25-Summary of Quarterly Results (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
($ In Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income
Loans $11,447 $11,515 $11,595 $11,275 $11,233 $10,913 $10,370 $ 9,791
Securities available for sale 2,739 2,542 2,099 2,455 2,337 2,389 2,907 2,724
Securities held to maturity 380 321 248 520 896 1,313 1,415 1,486
Interest bearing deposits in other banks 373 349 226 81 302 162 140 177
Dividends on Federal Home Loan Bank
of Boston stock 116 115 114 116 119 117 116 104
----------------------------------------------------------------------
Total interest and dividend income 15,055 14,842 14,282 14,447 14,887 14,894 14,948 14,282
----------------------------------------------------------------------
Interest expense
Deposits 5,589 5,664 5,533 5,768 6,038 5,918 5,797 5,569
Other borrowed funds 1,588 1,497 1,096 918 1,010 1,350 1,624 1,594
----------------------------------------------------------------------
Total interest expense 7,177 7,161 6,629 6,686 7,048 7,268 7,421 7,163
----------------------------------------------------------------------
Net interest and dividend income 7,878 7,681 7,653 7,761 7,839 7,626 7,527 7,119
Provision for possible loan losses 350 250 225 300 800 700 700 225
----------------------------------------------------------------------
Net interest and dividend income after
provision for possible loan losses 7,528 7,431 7,428 7,461 7,039 6,926 6,827 6,894
Net gains (losses) on sales of securities available
for sale 1,805 481 800 1,099 (1) 115 13 2,060
Other noninterest income 1,290 1,254 1,173 1,148 1,025 1,385 1,319 1,183
Noninterest expense<F1><F2> 7,221 5,560 5,565 5,859 12,681 6,163 6,803 6,127
----------------------------------------------------------------------
Earnings (loss) before income taxes 3,402 3,606 3,836 3,849 (4,618) 2,263 1,356 4,010
Income tax expense (benefit) 1,193 1,276 1,325 1,342 (1,592) 587 536 1,173
----------------------------------------------------------------------
NET EARNINGS (LOSS)<F1><F2> $ 2,209 $ 2,330 $ 2,511 $ 2,507 $(3,026) $1,676 $ 820 $ 2,837
======================================================================
Net earnings (loss) per share-basic<F3> $ .38 $ .40 $ .43 $ .44 $ (.55) $ .31 $ .15 $ .52
Net earnings (loss) per share-diluted<F3> $ .37 $ .39 $ .42 $ .42 $ (.55) $ .29 $ .14 $ .50
Annualized Returns
Return on average assets 1.03% 1.12% 1.27% 1.29% (1.50)% .82% .40% 1.44%
Return on average stockholders' equity 11.93% 12.74% 14.02% 14.63% (18.02)% 10.18% 5.29% 18.97%
<FN>
- --------------------
<F1> Included in noninterest expense during the fourth quarter of 1998 were
costs relating to the termination of certain officers. Additionally, a
writedown of premises in connection with a branch closing occured
during the fourth quarter of 1998. Noninterest expense associated with
these items amounted to $1,472,000 in the fourth quarter of 1998.
<F2> The Company recorded $5,917,000 in merger-related charges in the
fourth quarter of 1997 in connection with the acquisition of Primary
Bank. The after-tax amount of these costs were $4,325,000.
<F3> Net earnings (loss) per share is calculated by dividing net earnings
(loss) by the average common shares outstanding for each quarter.
Therefore, the sum of net earnings (loss) per share for the quarters
may not equal net earnings per share for the year.
</FN>
</TABLE>
<PAGE> 61
SELECTED CONSOLIDATED FINANCIAL DATA
Balance Sheet Data:
<TABLE>
<CAPTION>
At or for Years Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
($ In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total assets $878,147 $813,670 $797,840 $728,724 $668,310
Net loans 547,071 500,082 434,184 416,979 400,742
Loans held for sale 1,828 1,068 1,025 1,985 834
Investments<F1> 249,243 219,791 273,230 218,229 205,792
Deposits 650,487 648,983 609,667 591,123 520,099
Securities sold under agreements to repurchase 70,905 66,025 64,961 49,958 39,113
Other borrowings 80,608 25,877 59,190 28,499 56,143
Stockholders' equity 72,600 66,914 59,429 54,755 48,636
Operating Data:
Interest and dividend income $ 58,626 $ 59,011 $ 54,430 $ 51,798 $ 43,583
Interest expense 27,653 28,900 27,243 25,018 18,721
----------------------------------------------------
Net interest and dividend income 30,973 30,111 27,187 26,780 24,862
Provision for possible loan losses 1,125 2,425 1,372 3,337 1,032
Net gains (losses) on securities 4,185 2,187 650 338 (127)
Other noninterest income 4,865 4,912 5,081 4,703 4,561
Noninterest expense<F2> 24,205 31,774 22,640 24,364 22,633
----------------------------------------------------
Earnings before income taxes 14,693 3,011 8,906 4,120 5,631
Applicable income taxes 5,136 704 1,705 1,638 562
----------------------------------------------------
Net earnings<F2> $ 9,557 $ 2,307 $ 7,201 $ 2,482 $ 5,069
====================================================
Per share data:
Net earnings per share-basic $ 1.64 $ .42 $ 1.35 $ .46 $ .93
====================================================
Net earnings per share-diluted $ 1.60 $ .40 $ 1.28 $ .44 $ .88
====================================================
Cash dividends declared on common stock $ .50 $ .29 $ .20 $ .18 $ .14
Financial Ratios:
Return on average assets 1.17% .29% .95% .35% .76%
Return on average stockholders' equity 13.30% 3.57% 12.88% 4.56% 10.06%
<FN>
- --------------------
<F1> Investments include securities held to maturity, securities available
for sale and stock in the Federal Home Loan Bank of Boston.
<F2> The Company recorded $5,917,000 in merger-related charges in 1997
associated with the acquisition of Primary Bank. The after-tax amount
of these costs was $4,325,000.
</FN>
</TABLE>
<PAGE> 62
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 11, 1999 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, 1998. 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 26, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT-KPMG PEAT MARWICK LLP
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference of our report, included herein,
in the Registration Statement 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 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FINANCIAL DATA SCHEDULE - FISCAL YEAR END 1998
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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 23,506
<INT-BEARING-DEPOSITS> 19,532
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 219,765<F1>
<INVESTMENTS-CARRYING> 22,277
<INVESTMENTS-MARKET> 22,548
<LOANS> 554,193<F2>
<ALLOWANCE> 7,122
<TOTAL-ASSETS> 878,147
<DEPOSITS> 650,487
<SHORT-TERM> 70,905<F3>
<LIABILITIES-OTHER> 3,547
<LONG-TERM> 80,608
0
0
<COMMON> 6,790
<OTHER-SE> 65,810
<TOTAL-LIABILITIES-AND-EQUITY> 878,147
<INTEREST-LOAN> 45,832
<INTEREST-INVEST> 11,304
<INTEREST-OTHER> 1,490
<INTEREST-TOTAL> 58,626
<INTEREST-DEPOSIT> 22,554
<INTEREST-EXPENSE> 27,653
<INTEREST-INCOME-NET> 30,973
<LOAN-LOSSES> 1,125
<SECURITIES-GAINS> 4,185
<EXPENSE-OTHER> 24,205
<INCOME-PRETAX> 14,693
<INCOME-PRE-EXTRAORDINARY> 9,557
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,557
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.12
<LOANS-NON> 3,013
<LOANS-PAST> 146
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,651
<CHARGE-OFFS> 2,113
<RECOVERIES> 459
<ALLOWANCE-CLOSE> 7,122
<ALLOWANCE-DOMESTIC> 5,814
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,308
<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 $70,905
<F4>Includes other borrowings with the Federal Home Loan Bank of Boston of
$80,608
</FN>
</TABLE>
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT OF PRIMARY BANK
Independent Auditors' Report
The Board of Directors
Primary Bank
We have audited the accompanying statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1996 for
Primary Bank. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements for Primary Bank referred to above
present fairly, in all material respects, the results of its operations and its
cash flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 23, 1997
