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, 1999
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 10, 2000, was $78,913,000. 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 10, 2000, the number of shares of the Registrant's common
stock outstanding of record (exclusive of treasury shares) was 5,739,693.
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, 1999 "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 2000 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
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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 13
5. Statistical Information 13
A. Distribution of Assets, Liabilities,
and Stockholders' Equity; Interest
Rates and Interest Differential 13
B. Rate/Volume Analysis 13
C. Investment Portfolio 13
D. Loan Portfolio 17
E. Maturity of Loans 17
F. Nonperforming Loans and Assets 18
G. Summary of Loan Loss Experience and
Allocation of the Allowance for
Possible Loan Losses 19
H. Risks Associated with Commercial Real
Estate, Commercial and Construction Loans 21
I. Deposits 22
J. Maturities of Time Deposits 22
K. Return on Equity and Assets 23
L. Borrowings 23
M. Competition 24
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
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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 28
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, 1999 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 is 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 residential
real estate loans for sale in the secondary mortgage market.
The Company has devoted 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 43 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. During 1999, the
Bank began offering its products and services online through its internet
banking branch, GRANITe-bank.
Risk Management
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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, 1999, 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
("FHLB") of Boston.
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,
1999 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 1999, these assessments totaled $13,855.
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 in compliance with 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 $71,263,000 at December 31,
1999.
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, 1999, the Bank's ratio of core capital to average total assets
equaled 8.12%, 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, 1999, the Bank met its risk based capital requirements with a core
risk-based capital to risk-weighted assets ratio of 12.71% and a total risk-
based capital to risk-weighted assets ratio of 13.96%.
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, 1999, 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, 1999.
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 unsatisfactory 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 6.4% of the Bank's
deposits are OAKAR deposits, which are deposits purchased from institutions
previously insured by the Savings Association Insurance Fund ("SAIF"), and which
are assessed at the premium rate applicable to SAIF deposits.
During 1999, the Bank paid annual insurance premiums of $95,000 compared
with $93,000 in 1998.
The FDIC has established a system for setting deposit insurance premiums
based upon the risks a particular bank or savings association posed to its
deposit insurance funds. Under the risk-based deposit insurance assessment
system, the FDIC assigns an institution to one of three capital categories based
on the institution's financial information, as of the reporting period ending
six months before the assessment period. The three capital categories are (1)
well capitalized, (2) adequately capitalized and (3) undercapitalized. The FDIC
also assigns an institution to supervisory subgroups within each capital group,
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds, which may include information provided by the
institution's state supervisor.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications or
combinations of capital groups and supervisory subgroups, to which different
assessment rates are applied. Assessment rates for deposit insurance for both
BIF and SAIF currently range from 0 basis points to 27 basis points. The capital
and supervisory subgroup to which an institution is assigned by the FDIC is
confidential and may not be disclosed. A bank's rate of deposit insurance
assessments will depend upon the category and subcategory to which the bank is
assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on the Bank's earnings.
Under the Deposit Insurance Funds Act of 1996, the assessment base for
the payments on the bonds issued in the late 1980's by the Financing Corporation
("FICO") to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation was expanded to include, beginning January 1, 1997, the deposits of
institutions insured by the BIF, such as the Bank. Until December 31, 1999, the
rate of assessment for BIF-assessable deposits was one-fifth of the rate imposed
on deposits insured by the SAIF. The annual rate of assessments for the payments
on the FICO bonds for the period beginning on January 1, 1999 was 0.0122% for
BIF-assessable deposits and 0.0610% for SAIF-assessable deposits. Full pro-rata
sharing of the FICO bond payments is expected January 1, 2000.
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 1999, these regulations required reserves of 3% of total transaction
accounts of up to $46.5 million. Total transaction accounts amounting to over
$46.5 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 $4.9 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, 1999. The Bank also
has the authority to borrow from the Federal Reserve Board "discount window" to
meet its short-term liquidity needs.
During December, 1999, the amount of reservable liabilities exempt from
reserve requirements was increased to $5.0 million and the level at which
reservable liabilities would be subject to the 10% rate was lowered to $44.3
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 was reduced to
zero in August 1999. The effects of these recent actions will not have any
significant impact on the Bank's liquidity and profitability.
Holding Company Regulation
- --------------------------
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. Interstate holding company
acquisitions of banks are permitted generally without regard to state law,
except state laws regarding deposit concentration. 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, 1999, Granite State had consolidated Tier I and
total risk-based capital ratios of 12.93% and 14.18%, respectively and a
leverage ratio of Tier I capital to average total assets of 8.26%.
In addition, a bank holding company, which does not qualify as a
"financial holding company" under the recently enacted Gramm-Leach-Bliley
Financial Services Modernization Act, is generally prohibited from engaging in,
or acquiring direct or indirect control of, any company engaged in non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the FRB to be so closely related to banking or managing or
controlling banks as to be permissible. Some of the principal activities that
the FRB has determined by regulation to be so closely related to banking as to
be permissible are: making or servicing loans; performing certain data
processing services; providing discount brokerage services; acting as fiduciary,
investment or financial advisor; leasing personal or real property; making
investments in corporations or projects designed primarily to promote community
welfare; and acquiring a savings and loan association.
Bank holding companies that do qualify as a financial holding company
may engage in activities that are financial in nature or incidental to
activities which are financial in nature. Bank holding companies may qualify to
become a financial holding company if:
. each of its depository institution subsidiaries is "well capitalized,"
. each of its depository institution subsidiaries is "well managed";
. each of its depository institution subsidiaries has at least a
"satisfactory" CRA rating at its most recent examination; and
. the bank holding company has filed a certification with the
FRB that it elects to become a financial holding company.
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, 1999, 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 $4,529,000.
(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, 1999, Granite State and its subsidiary employed 281
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, 1999, on page 20 of the Annual
Report to Stockholders for the year ended December 31, 1999 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, 1999, on page 21 of the
Annual Report to Stockholders for the year ended December 31, 1999 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 (loss) 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, 1999, 1998 and 1997.
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, 1999, 1998 and 1997.
<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, 1999
US Government agency obligations $ 13,007 $ 482 $ 12,525
Other corporate obligations 5,010 303 4,707
------ ------ ------ ------
Total securities held to maturity $ 18,017 $ 0 $ 785 $ 17,232
====== ====== ====== ======
Securities available for sale
At December 31, 1999
US Treasury obligations $ 19,988 $ 43 $ 20,031
US Government agency obligations 105,454 $ 3,428 102,026
Other corporate obligations 71,824 27 2,427 69,424
Mortgage-backed securities:
FNMA 4,772 20 44 4,748
FHLMC 1,526 1 22 1,505
GNMA 870 40 910
SBA 397 2 1 398
------- ----- ----- ------
Total mortgage-backed securities 7,565 63 67 7,561
Mutual Funds 7,149 47 172 7,024
Marketable equity securities 10,693 909 2,096 9,506
------- ----- ----- -------
Total securities available for sale $ 222,673 $ 1,089 $ 8,190 $ 215,572
======= ===== ===== =======
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>
As a member of the 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, 1999,
1998 and 1997, the Company had investments in FHLB of Boston stock of $7,201,000
for each of the three years, respectively. At December 31, 1999 the weighted
average yield on FHLB of Boston stock was 6.65%.
The following table sets forth the maturity distribution of securities
held to maturity and securities available for sale at December 31, 1999 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 $ 12,501 6.29%
Due after 1 but within 5 years 7,487 6.36%
------
Total 19,988 6.32%
------
US Government Agency obligations
Due within 1 year - -
Due after 1 but within 5 years 97,481 6.14%
Due after 5 but within 10 years 20,980 6.40%
-------
Total 118,461 6.18%
-------
Other corporate obligations
Due within 1 year - -
Due after 1 but within 5 years 54,545 6.25%
Due after 5 but within 10 years 9,409 6.70%
Due after 10 years 12,880 7.83%
------
Total 76,834 6.57%
------
Mortgage-backed securities
Due within 1 year 17 9.08%
Due after 1 but within 5 years 994 6.34%
Due after 5 but within 10 years - -
Due after 10 years 6,554 6.11%
-------
Total 7,565 6.15%
-------
Total debt securities 222,848 6.33%
Mutual fund shares* 7,149 5.15%
Marketable equity securities* 10,693 3.20%
Net unrealized losses on
securities available for sale (7,101) -
-------
Total securities held to maturity
and securities available for sale $ 233,589 6.15%
=======
</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 $18,017,000, all of which are due after five years, but within
ten years with a weighted average yield of 6.40%. 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 did not own any securities 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, 1999.
(D) Loan Portfolio
The following table shows Granite State's loan distribution as of
December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Commercial, financial and agricultural $ 41,837 $ 48,418 $ 68,513 $ 63,543 $ 72,657
Real estate-residential 356,368 328,243 245,577 200,983 189,513
Real estate-commercial 136,566 146,093 151,474 139,400 124,319
Real estate-construction and land development 3,886 2,281 6,000 5,355 3,318
Installment 5,952 7,809 11,588 12,076 12,195
Other 24,085 22,855 26,013 20,940 24,484
------- ------- ------- ------- -------
Total Loans 568,694 555,699 509,165 442,297 426,486
Less:
Allowance for possible loan losses (7,032) (7,122) (7,651) (6,253) (7,151)
Unearned income (1,248) (1,506) (1,432) (1,860) (2,356)
------- ------- ------- ------- -------
Net Loans $ 560,414 $ 547,071 $ 500,082 $ 434,184 $ 416,979
======= ======= ======= ======= =======
</TABLE>
Included in real estate - residential loans in the table above are
multi-family real estate loans of $39,477,000, $36,184,000, $36,483,000,
$26,156,000 and $18,071,000, respectively, at December 31, 1999, 1998, 1997,
1996 and 1995.
(E) Maturity of Loans
The following table shows the maturity distribution of loans
outstanding, excluding non-accrual loans of $1,516,000 as of December 31, 1999.
<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 $ 9,450 $ 11,975 $ 19,937 $ 41,362
Real estate-residential 2,630 9,001 343,991 355,622
Real estate-commercial 5,620 22,907 107,745 136,272
Real estate-construction and land development 3,562 324 3,886
Installment 1,725 3,829 398 5,952
Other 2,977 1,277 19,830 24,084
------ ------ ------- -------
$ 25,964 $ 49,313 $ 491,901 $ 567,178
====== ====== ======= =======
Loans maturing after one year:
Fixed interest rate $ 27,246 $ 174,474 $ 201,720
Variable interest rate 22,067 317,427 339,494
------ ------- -------
$ 49,313 $ 491,901 $ 541,214
====== ======= =======
</TABLE>
Included in the loan maturity table above, are loans with a variable
interest rate totaling $22,067,000 which are scheduled to mature in one to five
years, of which $17,292,000 are scheduled to reprice within one year or less,
with the remaining $4,775,000 scheduled to reprice within one to five years.
Also included in the loan maturity table, are loans with a variable interest
rate totaling $317,427,000 which are scheduled to mature after five years, of
which $126,842,000 are scheduled to reprice within one year or less;
$118,524,000 which are scheduled to reprice within one to five years, with the
remaining $72,061,000 scheduled to reprice after five years.
(F) Nonperforming Loans and Assets
The following table summarizes Granite State's nonperforming loans and
assets at December 31. Amounts shown reflect principal only.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
($ In Thousands)
Nonperforming Loans:
Commercial, financial and agricultural $ 475 $ 678 $ 956 $ 204 $ 670
Real estate-residential 746 1,347 1,489 2,707 4,231
Real estate-commercial 294 592 4,261 1,032 2,106
Real estate-construction and land development 0 378 92 102 444
Installment and other 1 18 347 41 256
----- ----- ----- ----- -----
Total nonperforming loans 1,516 3,013 7,145 4,086 7,707
Other real estate owned 1,288 1,601 1,905 3,492 4,779
----- ----- ----- ----- ------
Total nonperforming loans and other
real estate owned $ 2,804 $ 4,614 $ 9,050 $ 7,578 $12,486
===== ===== ===== ===== ======
Percentage of nonperforming loans and
other real estate owned to total loans
receivable 0.49% 0.83% 1.78% 1.71% 2.93%
===== ===== ===== ===== =====
Percentage of nonperforming loans and
other real estate owned to total assets 0.32% 0.53% 1.11% 0.95% 1.71%
===== ===== ===== ===== =====
Loans delinquent 90 days or more still
accruing, not included in above $ 4 $ 146 $ 535 $ 93 $ 0
===== ===== ===== ===== =====
</TABLE>
Accrual of interest on loans is discontinued either when reasonable
doubt exists as to the full, timely collection of interest or principal, or when
a loan becomes contractually past due by ninety days unless the loan is well
secured and in the process of collection. When a loan is placed on nonaccrual
status, all interest previously accrued and not received is reversed against
current period earnings.
For the year ended December 31, 1999, 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 $157,000. The amount of
interest income on those loans included in net earnings for the year ended
December 31, 1999 amounted to $49,000.
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>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Condominiums and apartment projects $ 55 $ 131 $ 371 $ 780 $ 1,124
Single family housing projects 794 739 792 1,281 1,367
Retail and office 83 1,272
Non-retail commercial 691 756 773 798 1,996
Residential 235 451 437 1,078 625
----- ----- ----- ----- -----
1,775 2,077 2,373 4,020 6,384
Less: Valuation allowance 487 476 468 528 1,605
----- ----- ----- ----- -----
$ 1,288 $ 1,601 $ 1,905 $ 3,492 $ 4,779
===== ===== ===== ===== =====
</TABLE>
As of December 31, 1999, there were no loan concentrations exceeding 10%
of total loans.
As of December 31, 1999, 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 and/or
concentrations; 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 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 the total loan portfolio at December 31, 1998
compared to 48.2% at December 31, 1997, while commercial real estate and
commercial, financial and agricultural loans accounted for 35.0% of the total
loan portfolio in 1998 compared to 43.2% in 1997. The amount of the allowance
for possible loan losses decreased at December 31, 1999 compared to December 31,
1998, primarily as a result of decreases in nonperforming and impaired loans,
the low level of net charge-offs in 1999 and the continuing change in the
composition of the loan portfolio which was more predominantly residential real
estate in 1999, partially offset by the overall growth of the loan portfolio.
Residential real estate loans comprised 62.7% of the loan portfolio at
December 31, 1999 compared to 59.1% at December 31, 1998. Commercial real estate
loans and commercial, financial and agricultural loans comprised 31.4% of the
loan portfolio at December 31, 1999 compared to 35.0% at December 31, 1998.
While management believes that the allowance for possible loan losses at
December 31, 1999 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>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Balance at beginning of year $ 7,122 $ 7,651 $ 6,253 $ 7,151 $ 7,080
Provision for possible loan losses 50 1,125 2,425 1,372 3,337
Loans charged off (559) (2,113) (1,205) (3,020) (3,573)
Recoveries of loans previously charged off 419 459 178 750 307
----- ------ ------ ------ ------
Balance at end of year $ 7,032 $ 7,122 $ 7,651 $ 6,253 $ 7,151
===== ====== ====== ====== ======
</TABLE>
A summary of loan charge-offs by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Commercial, financial and agricultural $ 76 $ 503 $ 356 $ 684 $ 1,085
Real estate-residential 113 298 613 918 606
Real estate-commercial 326 903 150 907 1,736
Real estate-construction and land development 0 15 19 78 0
Installment and other loans 44 394 67 433 146
---- ----- ----- ----- -----
$ 559 $ 2,113 $ 1,205 $ 3,020 $ 3,573
==== ===== ===== ===== =====
</TABLE>
A summary of loan recoveries by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Commercial, financial and agricultural $ 258 $ 82 $ 35 $ 460 $ 67
Real estate-residential 67 199 64 60 110
Real estate-commercial 67 78 56 105 76
Real estate-construction and land development 0 1 1 57 38
Installment and other loans 27 99 22 68 16
---- ---- ---- ---- ----
$ 419 $ 459 $ 178 $ 750 $ 307
==== ==== ==== ==== ====
</TABLE>
The ratio of net loan charge-offs to average loans outstanding for the
year ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
($ In Thousands)
Net loan charge-offs $ 140 $ 1,654 $ 1,027 $ 2,270 $ 3,266
==== ===== ===== ===== =====
Average loans outstanding $559,651 $536,596 $474,844 $423,421 $419,533
======= ======= ======= ======= =======
Ratio of net loan charge-offs
to average loans outstanding 0.03% 0.31% 0.22% 0.54% 0.78%
===== ===== ===== ===== =====
</TABLE>
An allocation of the allowance for possible loan losses as of December
31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
($ In Thousands)
Commercial, financial
and agricultural $1,222 7.36% $1,245 8.71% $1,507 13.46%
Real estate-residential 1,558 62.66% 1,182 59.07% 973 48.23%
Real estate-commercial 2,299 24.01% 2,567 26.29% 3,229 29.75%
Real estate-construction
and land development 63 0.69% 278 0.41% 125 1.18%
Installment and other loans 511 5.28% 542 5.52% 690 7.38%
Unallocated 1,379 - 1,308 - 1,127 -
----- ------- ----- ------- ----- -------
$7,032 100.00% $7,122 100.00% $7,651 100.00%
===== ======= ===== ======= ===== =======
<CAPTION>
1996 1995
------------------------- -------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
($ In Thousands)
Commercial, financial
and agricultural $1,291 14.37% $1,401 17.04%
Real estate-residential 968 45.44% 1,204 44.43%
Real estate-commercial 2,415 31.52% 2,493 29.15%
Real estate-construction
and land development 120 1.21% 131 0.78%
Installment and other loans 580 7.46% 600 8.60%
Unallocated 879 - 1,322 -
----- ------- ----- -------
$6,253 100.00% $7,151 100.00%
===== ======= ===== =======
</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>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Allowance for possible
loan losses as a percentage
of total loans outstanding 1.24% 1.28% 1.50% 1.41% 1.68%
===== ===== ===== ===== =====
</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>
1999 1998 1997
------------------ ------------------ ------------------
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 $199,598 2.45% $183,692 2.59% $158,374 2.64%
Money market deposits 18,947 2.55% 24,474 2.75% 34,628 2.67%
Savings deposits 89,014 2.24% 88,473 2.55% 90,510 2.57%
Time deposits 256,660 5.26% 267,764 5.55% 283,514 5.61%
------- ------- -------
Total interest bearing deposits $564,219 3.70% $564,403 4.00% $567,026 4.11%
======= ===== ======= ===== ======= =====
Noninterest bearing deposits $ 73,145 N/A $ 69,575 N/A $ 63,870 N/A
====== ====== ======
</TABLE>
(J) Maturities of Time Deposits
The maturity distribution of time certificates of deposit of $100,000 or
more at December 31, 1999 follows:
<TABLE>
<CAPTION>
REMAINING MATURITY BALANCE
- ------------------ --------
<S> <C>
(In Thousands)
3 months or less $ 7,097
Over 3 through 6 months 4,496
Over 6 through 12 months 19,014
Over 12 through 36 months 3,152
Over 36 months 509
-------
$ 34,268
=======
</TABLE>
(K) Return on Equity and Assets
Operating and capital ratios for the year ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net earnings to average assets 1.18% 1.17% 0.29%
Net earnings to average
stockholders' equity 13.88% 13.30% 3.57%
Dividend pay out ratio on common stock -basic 32.00% 30.49% 69.05%
-diluted 32.75% 31.25% 72.50%
Average equity to average total assets 8.47% 8.82% 8.02%
</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, 1999 is incorporated herein by reference.
Short-Term Borrowings
- ---------------------
Outstanding short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
(In Thousands)
Securities sold under agreements to repurchase $ 75,042 $ 70,905 $ 66,025
====== ====== ======
Short-term and current portion of other borrowings $ 48 $ 45 $ 25,269
==== ==== ======
</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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
(In Thousands)
Securities sold under agreements to repurchase $ 75,042 $ 73,392 $ 67,693
====== ====== ======
Short-term and current portion of other borrowings $ 2,919 $ 10,178 $ 74,918
===== ====== ======
</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>
1999 1998 1997
---------------------- ---------------------- ----------------------
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 $ 65,078 4.08% $ 67,562 4.36% $ 59,826 4.76%
====== ===== ====== ===== ====== =====
Short-term and current portion
of other borrowings $ 621 5.15% $ 4,681 6.15% $ 33,043 5.70%
==== ===== ===== ===== ====== =====
</TABLE>
Other borrowings, consist of advances from the FHLB of Boston. Scheduled
maturities and interest rates on such advances at December 31, are as follows:
<TABLE>
<CAPTION>
Maturity Interest Rate 1999 1998
- ----------------------------------------------- ------------- ------- -------
<S> <C> <C> <C>
(In Thousands)
April 2003 5.84% $ 20,000 $ 20,000
May 2003 5.92% 10,000 10,000
Amortizing advance, final payment, October 2005 6.07% 113 128
Amortizing advance, final payment, October 2005 6.17% 199 227
May 2008 6.09% 10,000 10,000
October 2008 4.49% 20,000 20,000
October 2009 5.58% 10,000
December 2013 4.18% 20,000 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% 65 67
------ ------
Total other borrowings 90,563 80,608
Less: short-term and current portion of other borrowings 48 45
------ ------
Long-term portion of other borrowings $ 90,515 $ 80,563
====== ======
</TABLE>
Principal payments due on long-term borrowings after December 31, 1999
are $48,000 in 2000, $51,000 in 2001, $55,000 in 2002, $30,058,000 in 2003,
$61,000 in 2004 and $60,290,000 in years thereafter. The FHLB of Boston has the
right to call and require the repayment of $30,000,000 of borrowings during
2001, $20,000,000 of which is at an interest rate of 4.49% maturing in 2008 and
$10,000,000 of which is at an interest rate of 5.58% maturing in 2009.
Additionally, the FHLB of Boston has the right to call and require the repayment
of $20,000,000 of borrowings during 2000, which is at an interest rate of 4.18%
maturing in 2013.
(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, 1999. See also Notes 10 and 15 to the Consolidated Financial
Statements in the Annual Report to Stockholders for the year ended December 31,
1999 which are incorporated herein by reference.
<TABLE>
<CAPTION>
Office Type Location City/Town Status
- -------------- --------------------------------- ------------ -------
<S> <C> <C> <C>
Full service 122 West Street Keene Owned*
(Headquarters)
Full service Routes 9 and 63 Chesterfield Owned*
Full service Elm Street at Route 101 Milford Owned*
Full service Lorden Plaza Milford Leased*
Full service Route 101A & 122 Amherst Owned*
Full service Jct Route 101 & 202 Peterborough Owned*
Full service 35 Main Street Peterborough Owned*
Full service 70 Main Street Durham Owned*
Full service Southgate Plaza, Route 1 Portsmouth Owned*
Full service 93 Middle Street Portsmouth Owned*
Full service 9 Child's Way and Route 9 Hillsborough Owned*
Full service Lanctot's Shopping Center Rte 114 Weare Owned*
Full service 62 Peterborough Street Jaffrey Owned*
Full service 167 Main Street Antrim Owned*
Full service 197 Loudon Road Concord Leased*
Full service 66 No. Main Street Concord Leased*
Full service Pennichuck Square Merrimack Leased*
Full service 146 Main Street Nashua Leased*
<FN>
<F*> Office includes an ATM facility. The headquarters in Keene and the
Durham branch each have two ATM facilities on site.
</FN>
</TABLE>
Additionally, the Company operates twenty-three 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.
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 47) 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 44) is the Executive Vice President of Granite
State and Senior Executive Vice President and Chief Credit Officer of Granite
Bank, positions he assumed in 1986 and 2000, respectively. Mr. Henson joined the
Bank in 1980, and since 1982 has served in an executive management capacity.
William G. Pike (age 48) is the Executive Vice President and Chief
Financial Officer of Granite State and Senior Executive Vice President and Chief
Financial Officer of Granite Bank, positions he assumed in 1991 and 2000,
respectively. Mr. Pike has served in an executive management position in the
Bank since 1991.
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 closing
prices and dividend information on a quarterly basis for Granite State's common
stock for 1999 and 1998. The table does not reflect inter-dealer prices,
potential mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
1999
-------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
Dividends declared per share $ 0.14 $ 0.14 $ 0.14 $ 0.14
Stock Price
High......................... 23.50 24.50 23.50 23.31
Low.......................... 19.75 21.38 19.50 18.50
<CAPTION> 1998
-------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
Dividends declared per share $ 0.125 $ 0.125 $ 0.125 $ 0.125
Stock Price
High......................... 23.75 28.13 30.00 27.75
Low.......................... 16.50 17.63 24.75 22.75
</TABLE>
(b) Holders
As of March 10, 2000, Granite State had approximately 1,213 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 therefor. 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 its applicable capital requirements. 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 56 of the Annual Report to Stockholders
for the year ended December 31, 1999 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 26, inclusive, of the Annual Report to Stockholders
for the year ended December 31, 1999 is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk on pages 15
to 18 inclusive, of the Annual Report to Stockholders for the year ended
December 31, 1999 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 28 to 55,
inclusive, of the Annual Report to Stockholders for the year ended December 31,
1999 is incorporated herein by reference.
(b) Supplementary Financial Information
(1) Selected Quarterly Financial Data
The Selected Quarterly Financial Data on page 55 of the Annual Report to
Stockholders for the year ended December 31, 1999 is incorporated herein by
reference.
(2) Information on the Effects of Changing Prices
Management's discussion of the effects of inflation on page 26 of the
Annual Report to Stockholders for the year ended December 31, 1999 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 2000 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 2000 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
2000 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 2000 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, 1999, 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 28
Consolidated Statements of Financial Condition 29
Consolidated Statements of Earnings 30
Consolidated Statements of Comprehensive Income 31
Consolidated Statements of Stockholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34 - 55
(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, 1999, 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 10.7 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 10.9 Form of Executive Supplemental Retirement Income
Agreement with Messrs. Charles B. Paquette,
William C. Henson and William G. Pike <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, 1999
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 27.1 Financial Data Schedule - Fiscal Year End 1999
<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.
<F******> Incorporated by reference from Granite State Bankshares, Inc. Form
10Q, Exhibit 10.9 filed on August 12, 1999.
</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 23, 2000 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 3/23/00 Chief Executive Officer
- -------------------- (Principal Executive Officer)
Charles W. Smith and Chairman of the Board
/s/ William G. Pike 3/23/00 Executive Vice President
- ------------------- and Chief Financial Officer
William G. Pike (Principal Financial and
Accounting Officer)
/s/ Dr. David M.Bartley 3/23/00 Director
- -----------------------
Dr.David M.Bartley
/s/ Philip M. Hamblet 3/23/00 Director
- ---------------------
Philip M. Hamblet
/s/ Joseph S. Hart 3/23/00 Director
- ------------------
Joseph S. Hart
/s/ David J. Houston 3/23/00 Director
- --------------------
David J. Houston
/s/ James L. Koontz 3/23/00 Director
- -------------------
James L. Koontz
/s/ William Smedley V 3/23/00 Director
- ---------------------
William Smedley V
/s/ C. Robertson Trowbridge 3/23/00 Director
- ---------------------------
C. Robertson Trowbridge
/s/ James C. Wirths III 3/23/00 Director
- -----------------------
James C. Wirths III
/s/ E. Story Wright 3/23/00 Director
- -------------------
E. Story Wright
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 is 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 has a diversified lending operation that services Cheshire,
Hillsborough, Merrimack, Strafford and Rockingham counties, New Hampshire.
The subsidiary bank also originates residential real estate loans for sale
in the secondary mortgage market. The subsidiary bank has eighteen full
service offices and an additional twenty-three remote automatic teller
locations. During 1999, the subsidiary bank began offering its products
and services online through its internet banking branch,
GRANITe-bank.
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 6.4% of total deposits at December 31, 1999) 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, 1999 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 those 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,
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 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.
<PAGE> 11
FINANCIAL CONDITION
Consolidated assets at December 31, 1999 were $867.7 million, down
$10.4 million or 1.2% from $878.1 million at December 31, 1998.
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 $4.4
million at December 31, 1999 and $19.5 million at December 31, 1998. 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 (loss) 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 1999, 1998 or 1997.
At December 31, 1999 and 1998, the carrying values of securities held
to maturity and securities available for sale consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Securities held to maturity
US Government agency obligations $ 13,007 $ 17,265
Other corporate obligations 5,010 5,012
--------------------
Total securities held to maturity $ 18,017 $ 22,277
====================
Securities available for sale
US Treasury obligations $ 20,031 $ 83,716
US Government agency obligations 102,026 55,998
Other corporate obligations 69,424 46,457
Mortgage-backed securities 7,561 11,698
Mutual funds 7,024 6,402
Marketable equity securities 9,506 15,494
--------------------
Total securities available for sale $215,572 $219,765
====================
</TABLE>
At December 31, 1999 the net unrealized losses on securities available
for sale, net of related tax effects were $4.3 million, compared to net
unrealized gains of $1.6 million at December 31, 1998. These net unrealized
gains or losses are shown in accumulated other comprehensive income (loss)
as a separate component of stockholders' equity.
The weighted average maturity for all debt securities held to maturity
and available for sale, excluding mortgage-backed securities, is 63 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 262 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 total amortized cost of securities held to maturity and securities
available for sale, which excludes net unrealized gains and losses on
securities available for sale, remained fairly stable at $240.7 million at
December 31, 1999 compared to $239.5 million at December 31, 1998.
Loans
At December 31, 1999 and 1998 the Company's loan portfolio consisted
of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Commercial, financial and
agricultural $ 41,837 $ 48,418
Real estate-residential 356,368 328,243
Real estate-commercial 136,566 146,093
Real estate-construction and
land development 3,886 2,281
Installment 5,952 7,809
Other 24,085 22,855
--------------------
Total loans 568,694 555,699
Less:
Unearned income (1,248) (1,506)
Allowance for possible loan
losses (7,032) (7,122)
--------------------
Net loans $560,414 $547,071
====================
</TABLE>
Loans outstanding before deductions for unearned income and the
allowance for possible loan losses increased $13.0 million or 2.34% to
$568.7 million at December 31, 1999 from $555.7 million at December 31,
1998.
Residential real estate loans increased $28.2 million or 8.57% to
$356.4 million at December 31, 1999 from $328.2 million at December 31,
1998. The increase in residential real estate loans occurred throughout
1999; however, it slowed during the latter part of 1999, as higher interest
rates slowed residential loan
<PAGE> 12
refinance activity. Included in real estate-residential loans in the table
above are multi-family real estate loans of $39.5 million and $36.2 million,
respectively, at December 31, 1999 and 1998.
As shown in the table above, commercial, financial and agricultural
loans decreased $6.6 million, or 13.59%, and commercial real estate loans
decreased $9.5 million, or 6.52%. The decrease in commercial, financial and
agricultural loans and commercial real estate loans related primarily to the
pace of loan repayments and the highly competitive environment for
attracting loans amongst financial institutions in the Company's market
areas.
Total loan originations during 1999 and 1998, were $194.9 million and
$238.8 million, respectively. Loan originations for portfolio, excluding
loans originated for sale in the secondary mortgage market during 1999 and
1998 were $168.8 million and $198.7 million, respectively. Loan repayments
for 1999 and 1998, were $154.2 million and $149.4 million, respectively.
Loans charged off, net during 1999 and 1998 were $140 thousand and $1.7
million, respectively. Loans transferred to other real estate owned during
1999 and 1998 amounted to $1.1 million and $724 thousand, respectively.
The subsidiary bank originates certain residential real estate loans
for sale in the secondary mortgage market. Mortgage loans held for sale at
December 31, 1999 and 1998 were $479 thousand and $1.8 million,
respectively. Loans originated for sale in the secondary mortgage market
during 1999 and 1998 were $26.1 million and $40.1 million, respectively.
Loans sold in the secondary mortgage market during 1999 and 1998 were $27.5
million and $39.3 million, respectively. Since July 1, 1996, the Company has
been originating fifteen year fixed rate residential real estate loans for
portfolio. Prior to July 1, 1996, these loans had been sold in the secondary
mortgage market. In the future, new originations of these loans may be
retained as portfolio loans or sold in the secondary mortgage market,
depending upon management's evaluation of the Company's interest rate risk
objectives. The Company continues to write thirty year fixed rate
residential real estate loans for sale in the secondary mortgage market. At
December 31, 1999 and 1998 the Company serviced residential real estate
loans for others totaling $138.0 million and $148.0 million, respectively.
Risk Elements
The Company's management believes that New Hampshire has experienced
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 therefore considered nonperforming, with the exception of $4 thousand of
loans at December 31, 1999, $146 thousand of loans at December 31, 1998, and
$535 thousand of loans at December 31, 1997, all of which were in the
process of collection at those dates.
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998 1997
---- ---- ----
($ In Thousands)
<S> <C> <C> <C>
Nonperforming loans:
Residential real estate $ 746 $1,347 $1,489
Commercial real estate 294 592 4,261
Construction and land
development real estate 378 92
Commercial, financial and
agricultural 475 678 956
Installment and other 1 18 347
--------------------------
Total nonperforming
loans 1,516 3,013 7,145
Total other real estate
owned 1,288 1,601 1,905
--------------------------
Total nonperforming
assets $2,804 $4,614 $9,050
==========================
Ratios:
Total nonperforming loans
to total loans 0.27% 0.54% 1.40%
==========================
Total nonperforming assets
to total assets 0.32% 0.53% 1.11%
=========================
</TABLE>
The Company's nonperforming assets decreased $1.8 million or 39.23%
from $4.6 million at December 31, 1998 to $2.8 million at December 31, 1999.
The decrease in nonperforming assets relates primarily to decreases in
nonperforming commercial real estate loans of $298 thousand, a decrease in
nonperforming installment and other loans of $17 thousand, a decrease in
nonperforming commercial, financial and agricultural loans of $203 thousand,
a decrease in nonperforming residential real estate loans of $601 thousand,
a decrease in nonperforming construction and land development real estate
loans of $378 thousand and a decrease in other real estate owned of $313
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 inter-
<PAGE> 13
est 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 $489
thousand and $1.6 million, respectively, at December 31, 1999 and 1998. The
average recorded investment in impaired loans was $1.1 million, $3.5 million
and $3.0 million, respectively, in 1999, 1998 and 1997. No income was
recognized on impaired loans during 1999, 1998 and 1997. Total cash
collected on impaired loans during 1999, 1998 and 1997 was $779 thousand,
$710 thousand and $779 thousand, respectively, all of which 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 $252 thousand, $233 thousand and $1.1 million,
respectively, at December 31, 1999, 1998 and 1997. During 1999, 1998 and
1997, provisions for possible loan losses applicable to impaired loans were
$30 thousand, $201 thousand and $1.0 million, respectively. Impaired loans
charged off during 1999, 1998 and 1997 were $11 thousand, $1.0 million and
$386 thousand, respectively. At December 31, 1999, 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.
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real
estate acquired in settlement of loans is recorded at the lower of the
carrying value of the loan or the fair value of the property received less
an allowance for estimated costs to sell. Loan losses arising from the
acquisition of such properties are charged against the allowance for
possible loan losses. Provisions to reduce the carrying value to net
realizable value are charged to current period earnings as realized and
reflected as an additional valuation allowance. Operating expenses and gains
and losses upon disposition are reflected in earnings as realized. Other
real estate owned amounted to $1.3 million and $1.6 million at December 31,
1999 and 1998, 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 and/or concentrations; 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 existing conditions; historical loan charge-off experience; and the
results of bank regulatory examinations.
At December 31, 1999, 1998 and 1997, the allowance for possible loan
losses was $7.0 million, $7.1 million and $7.7 million, respectively, and
the ratio of the allowance to total loans outstanding was 1.24%, 1.28% and
1.50%, respectively. At December 31, 1999, 1998 and 1997, the allowance for
possible loan losses represented 463.9%, 236.4% and 107.1%, respectively, of
nonperforming loans. The amount of the allowance for possible loan losses
decreased at December 31, 1999 compared to December 31, 1998, primarily as a
result of decreases in nonperforming and impaired loans, the low level of
net charge-offs in 1999 and the continuing change in the composition of the
loan portfolio which was more predominantly residential real estate in 1999,
partially offset by the overall growth of the loan portfolio. 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 predominantly residential real estate in 1998,
partially offset by the overall growth of the loan portfolio.
While management believes that the allowance for possible loan losses
at December 31, 1999 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.
<PAGE> 14
Deposits
A summary of deposits at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
NOW accounts $195,833 $203,068
Savings accounts 85,770 87,150
Money market deposit accounts 17,516 19,659
Time certificates 256,103 266,901
--------------------
Total interest
bearing deposits 555,222 576,778
Noninterest bearing deposits 72,796 73,709
--------------------
Total deposits $628,018 $650,487
====================
</TABLE>
Savings deposits, which are comprised of NOW accounts, savings
accounts and money market deposit accounts decreased $10.8 million to $299.1
million at December 31, 1999 from $309.9 million at December 31, 1998. The
decrease related primarily to the cash needs of depositors at year end 1999.
Average savings deposits increased $11.0 million to $307.6 million in 1999
compared to $296.6 million in 1998, primarily as a result of the continued
success of the NOW account product introduced by the subsidiary bank during
1995.
Time certificates decreased $10.8 million to $256.1 million at
December 31, 1999 from $266.9 million at December 31, 1998 and average time
certificates balances decreased $11.1 million to $256.7 million during 1999
compared to $267.8 million during 1998. The decrease in the year end and
average balances of time certificates in 1999 compared to 1998, is primarily
the result of depositors looking to achieve higher yields by investing these
funds as they mature in alternate sources outside of traditional bank
products.
Noninterest bearing deposits decreased $913 thousand to $72.8 million
at December 31, 1999 compared to $73.7 million at December 31, 1998,
primarily due to the timing of the cash needs of depositors, while the
average balances of noninterest bearing deposits increased $3.5 million to
$73.1 million during 1999 compared to $69.6 million during 1998, as
depositors made greater use of these accounts during 1999 compared to 1998.
Time certificates with minimum balances of $100 thousand increased
$723 thousand, from $33.5 million at December 31, 1998 to $34.3 million at
December 31, 1999. The Company does not use brokers to solicit deposits.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase increased $4.1 million
or 5.83% to $75.0 million at December 31, 1999 from $70.9 million at
December 31, 1998. The increase in securities sold under agreements to
repurchase was used to fund changes in interest earning assets and other
interest bearing liabilities. 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
$10.0 million from $80.6 million at December 31, 1998 to $90.6 million at
December 31, 1999. The proceeds of borrowings from the FHLBB were used to
fund changes in interest earning assets and other interest bearing
liabilities.
Principal payments due on other borrowings after December 31, 1999 are
$48 thousand in 2000, $51 thousand in 2001, $55 thousand in 2002, $30.1
million in 2003, $61 thousand in 2004 and $60.3 million in years thereafter.
The FHLBB has the right to call and require the repayment of $30 million of
borrowings during 2001, $20 million of which is at an interest rate of 4.49%
maturing in 2008 and $10 million of which is at an interest rate of 5.58%
maturing in 2009. Additionally, the FHLBB has the right to call and require
the repayment of $20 million of borrowings during 2000, which is at an
interest rate of 4.18% maturing in 2013. Should the FHLBB require repayment
of the callable borrowings on the call dates, the interest cost to replace
such borrowings is likely to increase.
Stockholders' Equity
Stockholders' equity was $70.4 million at December 31, 1999, a
decrease of $2.2 million from $72.6 million at December 31, 1998. Book value
per share was $12.24 at December 31, 1999, down $0.07 or 0.57% from $12.31
at December 31, 1998. 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
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 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)
<PAGE> 15
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, 1999, approximately 63.8% of the
Company's loan portfolio was comprised of adjustable rate loans.
Approximately 72.2% of its securities available for sale and securities held
to maturity portfolios are debt securities maturing in less than five years,
with an additional 5.4% comprised of debt securities having adjustable rate
features. With regard to deposit liabilities, only 40.8% of total deposits
and 46.1% 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,
1999 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-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
and therefore, 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 FDIC guidelines.
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, 1999. 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, adjusted for estimated prepayment activity. The earlier of
contractual maturities or the next repricing date are used on all
securities. Certain marketable equity securities and certain mutual fund
securities totaling $8.7 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 $1.5 million have been excluded from this
analysis.
<PAGE> 16
INTEREST RATE SENSITIVITY GAP ANALYSIS
at December 31, 1999
<TABLE>
<CAPTION>
Sensitivity Period
-------------------------------------------------------------------------
0-3 3 Months- 1-3 3-5 Over
Months 1 Year Years Years 5 Years Total
-------------------------------------------------------------------------
($ In Thousands)
<S> <S> <C> <C> <C> <C> <C> <C>
Rate-sensitive Assets:
Interest bearing deposits in other
banks $ $ 4,402 $ 4,402
Rate 4.48% 4.48%
Securities, including stock in FHLBB $ 16,426 $ 21,396 $ 36,958 $120,061 $ 37,218 232,059
Rate 6.73% 6.09% 6.08% 6.22% 6.69% 6.30%
Loans and loans held for sale $ 123,709 113,458 123,305 104,674 102,511 567,657
Rate 8.56% 8.04% 7.75% 7.93% 7.30% 7.94%
-------------------------------------------------------------------------
Total $144,537 $134,854 $160,263 $224,735 $139,729 $804,118
=========================================================================
Rate-sensitive Liabilities:
Money Market Deposit Accounts $ $ 2,102 $ 6,656 $ 8,758 $ 17,516
Rate 2.53% 2.53% 2.53% 2.53%
Savings and NOW Accounts $ 14,080 42,240 112,641 $ 56,321 $ 56,321 281,603
Rate 2.46% 2.46% 2.46% 2.46% 2.46% 2.46%
Time certificates $ 52,079 169,847 29,857 3,768 552 256,103
Rate 4.68% 5.38% 5.23% 5.18% 5.20% 5.21%
Securities sold under agreements
to repurchase $ 66,811 8,231 75,042
Rate 4.75% 5.46% 4.82%
Other borrowings $ 12 36 106 30,119 60,290 90,563
Rate 6.06% 6.06% 6.06% 5.87% 4.84% 5.18%
-------------------------------------------------------------------------
Total $135,084 $227,010 $151,362 $ 90,208 $117,163 $720,827
=========================================================================
Period Sensitivity Gap $ 9,453 $(92,156) $ 8,901 $134,527 $ 22,566 $ 83,291
Cumulative Sensitivity Gap $ 9,453 $(82,703) $(73,802) $ 60,725 $ 83,291
Cumulative Sensitivity Gap as a
Percent of Total Rate-sensitive Assets 1.18% (10.28)% (9.18)% 7.55% 10.36%
</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 over the next twelve months should decline
by less than 10%. 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 25%. The following table presents as of December 31,
1999, 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> 17
<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 $(19,263) (17.57)% $(1,986) (5.96)%
+100 (9,831) (8.97) (989) (2.97)
Flat Rate 0 0 0 0
-100 10,609 9.68 1,451 4.35
-200 13,766 12.56 1,539 4.62
</TABLE>
At December 31, 1998, the change in estimated net present value of
equity was $(3,503,000) or (3.21)% assuming a 200 basis points increase in
interest rates and $(8,196,000) or (7.50)% assuming a 200 basis points
decrease in interest rates. The differences in the change in estimated net
present value of equity from 1999 to 1998 is primarily the result of an
increase in fifteen year fixed rate residential loans and an increase in
adjustable rate loans with initial terms of 3 to 7 years before the first
rate adjustment may occur. Additionally, the higher interest rate
environment experienced at the end of 1999 as compared to the end of 1998,
resulted in lower assumed prepayment speeds for loans in 1999 as compared to
1998, as well as increased volatility in the investment portfolio.
At December 31, 1998, the change in hypothetical net interest and
dividend income over the next twelve months was $(567,000) or (1.72)%
assuming a 200 basis points increase in interest rates and $(84,000) or
(0.26)% assuming a 200 basis points decrease in interest rates. The
differences in the change in hypothetical net interest and dividend income
in 1999 compared to 1998 is primarily due to the Company having greater rate
sensitive liabilities as compared to rate sensitive assets over a twelve
month time horizon in 1999 compared to 1998. These sensitivities were
impacted by a decrease in prepayment speeds for loans in 1999 as compared
to 1998 and a lower level of securities maturing in the one year horizon in
1999 as compared to 1998. As a result of the foregoing, the Company was more
susceptible to risk from changes in interest rates at December 31, 1999 than
at December 31, 1998.
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 are
reasonable based on historical 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 hypothetical 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 hypothetical 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 $9.5 million and an original cost of $10.7 million at December 31,
1999. 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 33% of the
quarters, a 20-25% movement in prices in 12% of the quarters, and a 25-35%
movement in prices in 7% 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 $951
thousand, $2.4 million and $3.3 million, respectively. The after tax impact
on capital relating to these hypothetical decreases in stock prices would be
$577 thousand, $1.4 million and $2.0 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.
<PAGE> 18
Comparison of Operating Results for the Years
Ended December 31, 1999 and 1998
Net Earnings
Operations in 1999 resulted in net earnings of $10.1 million, an
increase of $568 thousand over net earnings of $9.6 million for 1998. Basic
earnings per share was $1.75 in 1999 compared to $1.64 in 1998. Diluted
earnings per share was $1.71 in 1999 compared to $1.60 in 1998.
Earnings before income taxes were $15.4 million in 1999, an increase
of $710 thousand compared to earnings before income taxes of $14.7 million
in 1998. Earnings before income taxes increased in 1999 compared to 1998,
primarily as a result of increases in net interest and dividend income and
decreases in the provision for possible loan losses and noninterest expense,
partially offset by a decrease in noninterest income.
Net Interest and Dividend Income
Net interest and dividend income was $31.9 million and $31.0 million
in 1999 and 1998, respectively. The increase of $933 thousand in 1999
compared to 1998 relates primarily to an increase of $58.1 million or 7.74%
in average interest earning assets to $809.4 million in 1999 from $751.3
million in 1998, partially offset by an increase in average interest bearing
liabilities of $43.7 million, or 6.53%, to $712.9 million in 1999 from
$669.2 million in 1998. Additionally, the increase was partially offset by
decreases in the interest rate spread and net yield on interest earning
assets to 3.48% and 3.94%, respectively, in 1999 from 3.67% and 4.12%,
respectively, in 1998.
Interest income on loans decreased $545 thousand to $45.3 million in
1999 from $45.8 million in 1998. The decrease was primarily the result of a
decrease in average loan yields to 8.09% in 1999 from 8.54% in 1998,
partially offset by an increase in average loan balances of $23.1 million,
or 4.30%, to $559.7 million in 1999 from $536.6 million in 1998. The
decrease in loan yields is a result of the change in the mix of loans to a
larger percentage of lower yielding residential real estate loans and a
smaller percentage of commercial real estate and commercial, financial and
agricultural loans. The competitive environment amongst financial
institutions for attracting commercial real estate and commercial, financial
and agricultural loans also contributed to the lower loan yields in 1999.
The increase in average loan balances in 1999 compared to 1998, reflects the
strong loan demand in the residential real estate market during most of
1999, although the demand slowed in late 1999 as interest rates trended
higher. The growth in residential real estate loans was partially offset by
decreases in commercial, financial and agricultural loans and commercial
real estate loans. Such decreases were as a result of the pace of repayments
due to the low interest rate environment that was prevalent until the latter
part of 1999 and the competition for these loans amongst financial
institutions. Management expects that the competition for loans will
continue, which could reduce average yields realized on loans, thereby
reducing the interest rate spread in future periods.
Interest and dividend income on securities, including stock in FHLBB,
increased $1.8 million to $13.6 million in 1999 from $11.8 million in 1998.
The increase relates primarily to an increase in the average balances of
securities, including stock in FHLBB of $37.2 million, to $232.3 million in
1999 from $195.1 million in 1998, partially offset by a decrease in yields
to 5.87% in 1999 from 6.03% in 1998. The increase in average balances of
securities was due primarily to investments in available for sale securities
during the latter part of 1998, which were invested for all of 1999. The
decrease in yields was primarily the result of securities which were called
by the issuers in 1998, the proceeds of which were reinvested during 1998 at
lower rates, which rates remained in effect for all of 1999.
Interest expense on deposits decreased $1.7 million to $20.9 million
in 1999 from $22.6 million in 1998, with interest on savings deposits
decreasing $321 thousand and interest on time deposits decreasing $1.4
million. The decrease related primarily to a lower average cost of deposits
of 3.70% during 1999 compared to 4.00% during 1998, while average balances
of interest bearing deposits were relatively stable at $564.2 million in
1999 compared to $564.4 million in 1998. Average balances of savings
deposits increased $11.0 million to $307.6 million in 1999 from $296.6
million in 1998, while average balances of time deposits decreased $11.1
million to $256.7 million in 1999 from $267.8 million in 1998. 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 balance of savings
deposits, while the decrease in the average balance of time deposits related
primarily to those depositors continuing to look to achieve higher yields by
investing their funds in alternate sources outside of traditional bank
products. The lower cost of savings deposits of 2.39% in 1999 compared to
2.59% in 1998 and the lower cost of time deposits of 5.26% in 1999 compared
to 5.55% in 1998 related primarily to rate changes made during 1998 as rates
trended lower that remained in place for most of 1999.
Interest expense on securities sold under agreements to repurchase
decreased $291 thousand to $2.7 million in 1999 from $2.9 million in 1998.
The decrease was primarily related to a decrease in the cost of these short
term borrowings to 4.08% in 1999 compared to 4.36% in 1998, coupled with a
decrease in the average balances of $2.5 million to $65.1 million in 1999
from $67.6 million in 1998. The decrease in rates related primarily to short
term rates being lower during 1999 than 1998 on average, although during the
latter part of 1999 short term interest rates trended higher. The decrease
in average balances related primarily to local municipalities and businesses
making slightly less use of these instruments to invest their excess funds
during 1999 compared to 1998.
Interest expense on other borrowings, which consist primarily of
advances from the FHLBB, increased $2.2 million to $4.4 million in 1999 from
$2.2 million in 1998. The increase was primarily related to an increase in
average balances of other borrowings of $46.4 million to $83.6 million in
1999 compared to $37.2 million in 1998, partially offset by a decrease in
the cost of those borrowings to 5.23% in 1999 from 5.79% in 1998. The
increase in the average balance of other borrowings related prima-
<PAGE> 19
rily to the subsidiary bank making greater use of FHLBB advances to match
fund certain of its interest earning assets, as well as using special
callable FHLBB advances to borrow funds at attractive rates. The decrease in
the cost of other borrowings related to the subsidiary bank using special
callable advances to borrow funds from the FHLBB at attractive rates.
Average Balance Sheets and Net Interest and Dividend Income
The following table presents, for the periods indicated, average
balances, the total dollar amount of interest and dividend income from
interest earning assets and their resultant yields, as well as the interest
expense on interest bearing liabilities, and their resultant costs:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------ ------- -------- ------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans and loans held for sale <F1> $559,651 $45,287 8.09% $536,596 $45,832 8.54% $474,844 $42,307 8.91%
Interest bearing deposits in
other banks 17,456 876 5.02 19,634 1,029 5.24 14,570 781 5.36
Securities, including stock
in FHLBB <F2> 232,314 13,639 5.87 195,051 11,765 6.03 250,783 15,923 6.35
-------- ------- -------- ------- -------- -------
Total interest earning assets 809,421 59,802 7.39 751,281 58,626 7.80 740,197 59,011 7.97
------- ------- -------
Non-interest earning assets 59,057 70,690 72,400
Allowance for possible loan losses (7,138) (7,557) (6,594)
-------- -------- --------
Total assets $861,340 $814,414 $806,003
======== ======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities
Savings deposits $307,559 7,363 2.39 $296,639 7,684 2.59 $283,512 7,429 2.62
Time deposits 256,660 13,508 5.26 267,764 14,870 5.55 283,514 15,893 5.61
-------- ------- -------- ------- -------- -------
Total interest bearing deposits 564,219 20,871 3.70 564,403 22,554 4.00 567,026 23,322 4.11
Securities sold under agreements
to repurchase 65,078 2,654 4.08 67,562 2,945 4.36 59,826 2,847 4.76
Other borrowings 83,577 4,371 5.23 37,222 2,154 5.79 47,236 2,731 5.78
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities 712,874 27,896 3.91 669,187 27,653 4.13 674,088 28,900 4.29
------- ------- -------
Non-interest bearing liabilities
Demand deposits 73,145 69,575 63,870
Other liabilities 2,376 3,784 3,368
-------- -------- --------
Total non-interest bearing
liabilities 75,521 73,359 67,238
Stockholders' equity 72,945 71,868 64,677
-------- -------- --------
Total liabilities and
stockholders' equity $861,340 $814,414 $806,003
======== ======== ========
Net interest and dividend
income/interest rate spread $31,906 3.48% $30,973 3.67% $30,111 3.68%
======= ==== ======= ==== ======= ====
Net earning balance/net yield on
interest earning assets $ 96,547 3.94% $ 82,094 4.12% $ 66,109 4.07%
======== ==== ======== ==== ======== ====
- --------------------
<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> 20
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, 1999 vs. 1998
Increase (Decrease) Due To
----------------------------
Volume Rate Total
----------------------------
(In Thousands)
<S> <C> <C> <C>
Interest income on loans $2,407 $(2,952) $ (545)
Interest income on interest bearing deposits in other banks (111) (42) (153)
Interest and dividend income on securities and stock in FHLBB 2,176 (302) 1,874
----------------------------
Total interest and dividend income 4,472 (3,296) 1,176
----------------------------
Interest expense on deposits (7) (1,676) (1,683)
Interest expense on securities sold under agreements to repurchase (106) (185) (291)
Interest expense on other borrowings 2,404 (187) 2,217
----------------------------
Total interest expense 2,291 (2,048) 243
----------------------------
Net interest and dividend income $2,181 $(1,248) $ 933
============================
</TABLE>
<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 280 (182) 98
Interest expense on other borrowings (582) 5 (577)
-----------------------------
Total interest expense (415) (832) (1,247)
-----------------------------
Net interest and dividend income $ 2,470 $(1,608) $ 862
=============================
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses was $50 thousand in 1999
compared to $1.1 million in 1998. The decrease in the provision resulted
primarily from a decrease in nonperforming loans, the low level of net loan
charge-offs in 1999 compared to 1998, the continued shift in the mix of
loans to a portfolio which was more predominantly residential real estate
loans in 1999, and management's overall evaluation of the loan portfolio and
the adequacy of the level of the allowance for possible loan losses.
Nonperforming loans decreased $1.5 million to $1.5 million at December 31,
1999 compared to $3.0 million at December 31, 1998. Loans charged off in
1999 were $559 thousand compared to $2.1 million in 1998. Recoveries of
loans previously charged off were $419 thousand in 1999 compared to $459
thousand in 1998. Net loans charged off were $140 thousand in 1999 compared
to $1.7 million in 1998. Residential real estate loans comprised 62.7% of
the loan portfolio at December 31, 1999 compared to 59.1% at December 31,
1998. Commercial real estate loans and commercial, financial and
agricultural loans comprised 31.4% of the loan portfolio at December 31,
1999 compared to 35.0% at December 31, 1998.
Noninterest Income
Noninterest income was $5.5 million in 1999, a decrease of $3.6
million or 39.64% compared to $9.1 million in 1998. The decrease in 1999
over 1998 was primarily attributable to decreases in net gains on sales of
securities available for sale of $3.5 million, net gains on sales of loans
into the secondary mortgage market of $158 thousand and other noninterest
income of $140 thousand, partially offset by an increase in customer account
fees and service charges of $269 thousand. The decrease in net gains on
sales of securities available for sale was primarily
<PAGE> 21
as a result of a decrease in gains on sales of equity securities in 1999
compared to 1998. The decrease in net gains on sales of loans in the
secondary mortgage market was as a result of a decrease in loans originated
for and sold into the secondary mortgage market in 1999 compared to 1998,
because of the increases in interest rates during the latter part of 1999,
which slowed refinancing activity for residential real estate loans. The
decrease in mortgage service fees was as a result of a decrease in the
balance of loans being serviced in 1999 compared to 1998, due to a slowing
of refinance activity. The decrease in other noninterest income was
primarily as a result of a decrease in gains on sales of other assets in
1999 compared to 1998, partially offset by income from increases in the cash
surrender value of life insurance policies. The increase in customer account
fees and service charges related to changes in retail customer account fees
and service charges implemented in the latter part of 1998 and changes in
commercial customer account fees and service charges implemented in early
1999.
Noninterest Expense
Noninterest expense was $21.9 million in 1999, a decrease of $2.3
million compared to $24.2 million in 1998. The decrease was attributable to
a decrease in salaries and benefits expenses of $600 thousand to $11.8
million in 1999 compared to $12.4 million in 1998, a decrease in occupancy
and equipment expenses of $836 thousand to $4.1 million in 1999 from $5.0
million in 1998 and a decrease in other noninterest expenses of $821
thousand to $5.6 million in 1999 from $6.4 million in 1998.
The decrease in salaries and benefits expenses of $600 thousand was
primarily attributable to continued personnel efficiencies realized from the
merger with Primary Bank, as average full time equivalent employees was 288
in 1999 compared to 301 in 1998, a decrease in commissions paid to loan
originators as a result of a slow down in residential loan refinancing
activity and a decrease of $760 thousand relating to the cost of terminating
certain officers in 1998, for which there was no such expense in 1999,
partially offset by normal salary increases of approximately 4.50% and an
increase in retirement expense. The increase in retirement expense is
primarily related to the Supplemental Executive Retirement Plan ("SERP")
being amended during 1999 and certain additional officers becoming
participants in the SERP, as well as an increase in expense related to the
defined benefit pension plan ("Plan") for former Primary Bank employees, who
as current Granite Bank employees became full participants in the Plan for
measurement purposes during 1999.
Occupancy and equipment expense decreased $836 thousand to $4.1
million in 1999 from $5.0 million in 1998. The decrease is primarily
attributable to a decrease of $712 thousand relating to a writedown of bank
buildings during 1998 on property used as a branch office which was closed
and other efficiencies realized during 1999 relating to the closing of the
branch.
Other expenses decreased $821 thousand to $5.6 million in 1999 from
$6.4 million in 1998. The significant changes in other expenses were
decreases in professional fees of $458 thousand, decreases in data
processing costs of $147 thousand and decreases in printing and supplies
expense of $201 thousand. The decrease in professional fees related
primarily to a decrease in legal fees, as defense costs and legal fees
associated with nonperforming assets were lower in 1999 than 1998. The
decrease in data processing costs and printing and supplies expense related
to continuing efficiencies realized from the merger with Primary Bank.
Income Taxes
Income tax expense increased $142 thousand to $5.3 million in 1999
compared to $5.1 million in 1998 and represented effective tax rates of
34.3% and 35.0%, respectively, of pretax income.
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.
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
<PAGE> 22
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.
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
increased $98 thousand to $2.9 million in 1998 from $2.8 million in 1997.
The increase was primarily the result of an increase in average balances of
$7.8 million to $67.6 million in 1998 from $59.8 million in 1997, partially
offset by a decrease in the average cost of securities sold under agreements
to repurchase to 4.36% in 1998 from 4.76% in 1997. The increase in average
balances was as a result of local municipalities and businesses making
greater use of securities sold under agreements to repurchase in investing
their excess funds. The lower average cost of securities sold under
agreements to repurchase related to the continued low interest rate
environment that was prevalent during 1998.
Interest expense on other borrowings decreased $577 thousand to $2.2
million in 1998 from $2.7 million in 1997. The decrease was primarily
related to a decrease in the average balances of other borrowings of $10.0
million to $37.2 million in 1998 from $47.2 million in 1997, while the cost
of these borrowings was relatively stable at 5.79% in 1998 and 5.78% in
1997.
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, financial
and agricultural 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 securities 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.
<PAGE> 23
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 1998 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
was 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.
Capital Resources and Liquidity
Capital Resources
The Company's capital base totaled $70.4 million or 8.11% of total
assets at December 31, 1999 compared to $72.6 million, or 8.27% of total
assets at December 31, 1998. Stockholders' equity decreased $2.2 million,
primarily related to a decrease with respect to accumulated other
comprehensive income (loss) of $5.9 million, treasury stock purchases of
$4.1 million and dividends declared of $3.3 million, partially offset by net
earnings of $10.1 million, reissuance of common stock from treasury for the
exercise of stock options, including related tax effects of $428 thousand,
restricted stock award amortization of $305 thousand and Employee Stock
Ownership Plan distribution and indebtedness repayments totaling $111
thousand.
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 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, 1999 and 1998, the Company
and subsidiary bank meet all capital adequacy requirements to which they are
subject. See note 20 of Notes to Consolidated Financial Statements for
further details of regulatory capital.
As of December 31, 1999, 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. There have
been no conditions or events since that notification that management
believes would cause a change in the subsidiary bank's categorization.
On August 11, 1998, the Company announced a Stock Repurchase Program
("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
cor-
<PAGE> 24
porate purposes. As of December 31, 1999, 199,061 shares, had been
repurchased under the Program, with an additional 95,850 shares still
available to be repurchased.
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 1999, 1998 and 1997 were $5.3 million, $2.3 million and
$3.0 million, respectively. The primary source of liquidity in the Company
is its interest bearing deposit with its subsidiary bank of $2.1 million at
December 31, 1999. Management believes that these funds are adequate to
provide for the Company's needs.
The subsidiary bank monitors its level of short-term assets and
liabilities, maintaining an appropriate balance between liquidity, risk and
return. The major sources of liquidity are deposits, securities available
for sale, maturities of securities held to maturity, interest bearing
deposits in 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,
--------------------------------
1999 1998 1997
--------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash and due from banks at beginning of year $ 23,506 $ 28,677 $ 30,559
Operating activities:
Net earnings 10,125 9,557 2,307
Adjustments to reconcile net earnings to net
cash provided by operating activities (727) (1,411) 4,496
--------------------------------
Net cash provided by operating activities 9,398 8,146 6,803
Net cash provided by (used in) investing activities 1,045 (73,132) (15,609)
Net cash provided by (used in) financing activities (15,374) 59,815 6,924
--------------------------------
Cash and due from banks at end of year $ 18,575 $ 23,506 $ 28,677
================================
</TABLE>
Operating activities provided positive cash flows in 1999, 1998 and
1997 and were primarily comprised of net earnings and net noncash items
included in earnings which negatively affected cash flows in 1999 and 1998
and positively affected cash flows in 1997.
Investing activities provided cash in 1999 and used cash in 1998 and
1997. 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 1999, 1998 and 1997, loan originations net
of repayments were $14.2 million, $48.9 million and $68.6 million,
respectively. Purchases of securities available for sale and securities held
to maturity were $101.0 million, $124.6 million and $154.3 million,
respectively, in 1999, 1998 and 1997. A substantial portion of the net loan
originations and purchases of securities available for sale and securities
held to maturity in 1999, 1998 and 1997, 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 1999 and 1998 and increases in deposits in 1997.
Financing activities used cash in 1999 and provided cash in 1998 and
1997. 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 1999, deposits
decreased $22.5 million, while in 1998 and 1997, deposits increased by $1.5
million and $39.3 million, respectively. Securities sold under agreements to
repurchase increased $4.1 million, $4.9 million and $1.1 million,
respectively in 1999, 1998 and 1997. In 1999 and 1998, proceeds from other
borrowings exceeded repayments, which increased other borrowings by $10.0
million and $54.7 million, respectively, while other borrowings decreased by
$33.3 million in 1997, as repayments exceeded proceeds of other borrowings.
Net cash used in financing activities during 1999 was funded by cash
provided from operating and investing activities and a decrease in cash and
due from banks. Net cash provided by financing activities in 1998 and 1997
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
<PAGE> 25
FHLBB and 2 to 5 year fixed income US Treasury and US Government agency
securities and corporate securities. In addition to assets in cash on hand
and due from banks of $18.6 million at December 31, 1999, the Company
through its subsidiary bank has interest bearing deposits in other banks,
primarily with FHLBB of $4.4 million and securities available for sale of
$215.6 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, 1999, the subsidiary bank had $90.6
million of outstanding borrowings with the FHLBB, with an additional
borrowing capacity of approximately $245.1 million.
The Company anticipates that the subsidiary bank will have sufficient
funds available to meet its current loan commitments. At December 31, 1999,
the subsidiary bank had outstanding loan commitments of $51.3 million. For
additional information 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, 1999, totaled $221.9 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
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which was 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 (loss) 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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133", which delayed the effective
date. SFAS No. 133 is now effective for fiscal years beginning after June
15, 2000. The Company expects to adopt SFAS No. 133 on January 1, 2001 and
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 had developed and implemented a plan to deal with the
issues associated with programming code within computer systems and related
embedded technology with respect to the rollover of the two digit year value
to 00 ("Year 2000"). The issue was whether computer systems would properly
recognize date sensitive information when the year changed to 2000.
The Company has not experienced any significant issues associated with
the Year 2000 problem as a result of the date change to January 1, 2000 or
any date subsequent thereto. The incremental costs related to the Year 2000
compliance were approximately $90,000 in 1999 and $101,000 in 1998,
respectively. Any additional incremental costs associated with Year 2000
issues are not expected to be material. Management will continue to monitor
operations through the year 2000 and although no assurances can be given, it
is not expected that any future adverse developments will arise with respect
to Year 2000.
<PAGE> 26
[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, 1999 and 1998, 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, 1999. These financial
statements are the responsibility of the management of Granite State
Bankshares, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
Boston, Massachusetts
January 11, 2000
<PAGE> 28
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,575 $ 23,506
Interest bearing deposits in other banks, at cost, which approximates market value 4,402 19,532
Securities available for sale (amortized cost $222,673,000 in 1999 and $217,186,000 in 1998) 215,572 219,765
Securities held to maturity (market value $17,232,000 in 1999 and $22,548,000 in 1998) 18,017 22,277
Stock in Federal Home Loan Bank of Boston 7,201 7,201
Loans held for sale 479 1,828
Loans 568,694 555,699
Less: Unearned income (1,248) (1,506)
Allowance for possible loan losses (7,032) (7,122)
---------------------
Net loans 560,414 547,071
Premises and equipment 16,967 17,700
Other real estate owned 1,288 1,601
Other assets 24,762 17,666
---------------------
Total assets $867,677 $878,147
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Interest bearing deposits $555,222 $576,778
Noninterest bearing deposits 72,796 73,709
---------------------
Total deposits 628,018 650,487
Securities sold under agreements to repurchase 75,042 70,905
Other borrowings 90,563 80,608
Other liabilities 3,685 3,547
---------------------
Total liabilities 797,308 805,547
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
shares issued at December 31, 1999 and 1998, respectively 6,790 6,790
Additional paid-in capital 37,919 38,018
---------------------
44,709 44,808
Retained earnings 39,870 32,998
Accumulated other comprehensive income (loss) (4,312) 1,583
---------------------
80,267 79,389
Less: Treasury stock, at cost, 1,039,089 and 889,759 shares at December 31, 1999 and
1998, respectively (9,418) (6,065)
Unallocated common stock acquired by the ESOP (36) (71)
Unearned restricted stock (444) (653)
---------------------
Total stockholders' equity 70,369 72,600
---------------------
Total liabilities and stockholders' equity $867,677 $878,147
=====================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 29
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
($ In Thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income
Loans $ 45,287 $ 45,832 $ 42,307
Debt securities available for sale 11,182 9,110 9,771
Marketable equity securities available for sale 738 725 586
Securities held to maturity 1,248 1,469 5,110
Interest bearing deposits in other banks 876 1,029 781
Dividends on Federal Home Loan Bank of Boston stock 471 461 456
-------------------------------------
Total interest and dividend income 59,802 58,626 59,011
-------------------------------------
Interest expense
Deposits 20,871 22,554 23,322
Securities sold under agreements to repurchase 2,654 2,945 2,847
Other borrowings 4,371 2,154 2,731
-------------------------------------
Total interest expense 27,896 27,653 28,900
-------------------------------------
Net interest and dividend income 31,906 30,973 30,111
Provision for possible loan losses 50 1,125 2,425
-------------------------------------
Net interest and dividend income after provision for possible loan losses 31,856 29,848 27,686
Noninterest income
Customer account fees and service charges 2,552 2,283 2,969
Mortgage service fees 485 566 634
Net gains on sales of securities available for sale 708 4,185 2,187
Net gains on sales of loans 567 725 415
Other 1,151 1,291 894
-------------------------------------
Total noninterest income 5,463 9,050 7,099
Noninterest expense
Salaries and benefits 11,844 12,444 13,822
Occupancy and equipment 4,122 4,958 4,197
Other real estate owned 359 357 63
Merger-related charges 34 5,917
Other 5,591 6,412 7,775
-------------------------------------
Total noninterest expense 21,916 24,205 31,774
-------------------------------------
Earnings before income taxes 15,403 14,693 3,011
Income taxes 5,278 5,136 704
-------------------------------------
NET EARNINGS $ 10,125 $ 9,557 $ 2,307
=====================================
Net earnings per share-basic $ 1.75 $ 1.64 $ .42
=====================================
Net earnings per share-diluted $ 1.71 $ 1.60 $ .40
=====================================
Shares used in computing net earnings per share-basic 5,778,272 5,818,856 5,444,350
Shares used in computing net earnings per share-diluted 5,927,668 5,990,745 5,751,262
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 30
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Net earnings $10,125 $ 9,557 $ 2,307
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale
arising during the period (8,972) (2,543) 9,086
Related income tax effects 3,507 982 (3,620)
-----------------------------
Net unrealized holding gains (losses) on securities available for
sale, net of related income tax effects (5,465) (1,561) 5,466
-----------------------------
Less: reclassification adjustment for net gains on sales of securities
available for sale realized in net earnings:
Realized net gains (708) (4,185) (2,187)
Related income tax effects 278 1,616 845
-----------------------------
Net reclassification adjustment (430) (2,569) (1,342)
-----------------------------
Total other comprehensive income (loss) (5,895) (4,130) 4,124
-----------------------------
Comprehensive income $ 4,230 $ 5,427 $ 6,431
=============================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 31
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated Unallocated
Additional Other Common Unearned
Common Paid-in Retained Treasury Comprehensive Stock Acquired Restricted
Stock Capital Earnings Stock Income(Loss) by the ESOP Stock Total
------ ---------- -------- -------- ------------- -------------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 accumulated other
comprehensive income (loss),
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 accumulated other
comprehensive income (loss),
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
Net earnings 10,125 10,125
Payment of Employee Stock
Ownership Plan Indebtedness 35 35
Employee Stock Ownership Plan
distribution 76 76
Cash dividends declared on
common stock, $.56 per share (3,253) (3,253)
Change in accumulated other
comprehensive income (loss),
net of income taxes (5,895) (5,895)
Restricted stock awards (8) 104 (96) -
Restricted stock award
amortization 305 305
Reissuance of common stock from
treasury upon exercise of stock
options, including related tax
effects (167) 595 428
Purchase of common stock for
treasury (4,052) (4,052)
-----------------------------------------------------------------------------------------------
Balance as of December 31, 1999 $6,790 $37,919 $39,870 $(9,418) $(4,312) $ (36) $ (444) $70,369
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 32
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) in cash and due from banks
Cash flows from operating activities
Net earnings $ 10,125 $ 9,557 $ 2,307
Adjustments to reconcile net earnings to net cash provided by operating activities
Provision for possible loan losses 50 1,125 2,425
Provision for depreciation and amortization 2,363 2,468 2,329
Net amortization of security discounts and premiums 193 30 24
Provision for loss on other real estate owned 146 53 25
Earned compensation-performance-based stock options 1,078
Deferred income taxes (benefits) 412 (43) (1,243)
Realized gains on sales of securities available for sale, net (708) (4,185) (2,187)
Writedown of premises and equipment 712 1,305
Loans originated for sale (26,122) (40,082) (26,435)
Proceeds from sale of loans originated for sale 28,038 40,047 26,807
(Increase) decrease in other assets (4,739) 316 3,509
Increase (decrease) in other liabilities 106 (1,285) (2,270)
Allocation of common stock by the ESOP 111 133 36
Decrease in unearned restricted stock 305 362
Realized gains on sales of loans (567) (725) (415)
Gains on sales of other assets (11) (465)
Increase (decrease) in unearned income (258) 74 (428)
Realized (gains) losses on sales of other real estate owned (46) 54 (64)
--------------------------------
Net cash provided by operating activities 9,398 8,146 6,803
--------------------------------
Cash flows from investing activities
Proceeds from sales of securities available for sale 57,067 5,462 116,531
Proceeds from maturities and calls of securities available for sale 35,000 50,750 52,500
Principal payments received on securities available for sale 3,916 9,596 13,294
Purchase of securities available for sale (100,995) (109,586) (147,266)
Purchase of securities held to maturity (15,012) (7,000)
Proceeds from maturities and calls of securities held to maturity 4,300 26,765 33,150
Principal payments received on securities held to maturity 2,129
Purchase of Federal Home Loan Bank of Boston stock (836)
Loan originations, net of repayments (14,246) (48,912) (68,627)
Purchase of premises and equipment (1,465) (1,533) (2,489)
Proceeds from sales of other assets 760 465
Net (increase) decrease in interest-bearing deposits in other banks 15,130 7,920 (9,459)
Proceeds from sales of other real estate owned 1,324 921 2,376
Other 254 32 88
--------------------------------
Net cash provided by (used in) investing activities 1,045 (73,132) (15,609)
--------------------------------
Cash flows from financing activities
Net increase (decrease) in demand, NOW, money market deposit and savings
accounts (11,671) 24,779 19,865
Net increase (decrease) in time certificates (10,798) (23,275) 19,451
Net increase in securities sold under agreements to repurchase 4,137 4,880 1,064
Increase (decrease) in other borrowings 9,955 54,731 (33,313)
Repayment on liability relating to ESOP (35) (36) (36)
Dividends paid on common stock (3,185) (2,824) (1,285)
Proceeds from issuance of common stock 2,042 1,483
Reissuance of common stock from treasury 275 88
Purchase of common stock for treasury (4,052) (289) (305)
Purchase of common stock relating to restricted stock awards (281)
--------------------------------
Net cash provided by (used in) financing activities (15,374) 59,815 6,924
--------------------------------
Net decrease in cash and due from banks (4,931) (5,171) (1,882)
Cash and due from banks at beginning of year 23,506 28,677 30,559
--------------------------------
Cash and due from banks at end of year $ 18,575 $ 23,506 $ 28,677
================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 33
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 is 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 has a diversified lending operation that services Cheshire,
Hillsborough, Merrimack, Strafford and Rockingham counties, New Hampshire.
The subsidiary bank also originates residential real estate loans for sale
in the secondary mortgage market. The subsidiary bank has eighteen full
service offices and an additional twenty-three remote automatic teller
locations. During 1999, the subsidiary bank began offering its products and
services online through its internet banking branch, GRANITe-bank.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of
the dates of the balance sheets, and revenues and expenses 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 1998 and 1997 consolidated financial statements
have been reclassified to conform to the 1999 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 (loss) as a
separate component of stockholders' equity, net of estimated income taxes.
During 1999, 1998 and 1997, 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
principal or recorded as income according to management's judgment as to the
collectibility of principal.
The Company measures loan impairment on commercial, financial and
agricultural loans, commercial real estate loans and construction and land
development 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
<PAGE> 34
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,
financial and agricultural loans, commercial real estate loans and
construction and land development 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. Nonper-
forming, 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 and/or concentrations; 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 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.
Mortgage 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
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.
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
<PAGE> 35
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
The Company has investments in two tax advantaged limited
partnerships. These investments are included in other assets and amortized
over the same period the tax benefits are expected to be received.
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 Statement of Financial Accounting Standards
("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 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.
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 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
<PAGE> 36
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. Under these agreements, 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 (loss) 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 (loss) included in stockholders' equity is comprised
exclusively of net unrealized gains (losses)on securities available for
sale, net of related tax effects.
The Company discloses 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.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which was 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 (loss) 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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133". SFAS No. 133 is now effective
for fiscal years beginning after June 15, 2000. The Company expects to adopt
SFAS No. 133 on January 1, 2001 and 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 acquisition 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 expenses
were recorded at the date of combination and consisted of personnel costs of
$1,462,000 related to the costs of employee severance, data processing costs
of $1,282,000 related to the termination of data processing contracts with
outside service bureaus, facilities and equipment costs of $1,305,000
related to writedowns of property owned and the disposition of unusable
equipment and other costs of $1,868,000 which included investment banking,
legal and accounting fees, due diligence costs, proxy registration/filing
fees and mailing costs. The 1998 expenses were insignificant.
<PAGE> 37
NOTE 3-Earnings Per Share
Information regarding the computations of earnings per share is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
($ in Thousands, except per share data)
<S> <C> <C> <C>
Net earnings $ 10,125 $ 9,557 $ 2,307
=====================================
Weighted average common
shares outstanding-basic 5,778,272 5,818,856 5,444,350
Dilutive effect of stock
options and restricted stock
awards computed using the
treasury stock method 149,396 171,889 306,912
-------------------------------------
Weighted average common
shares outstanding-diluted 5,927,668 5,990,745 5,751,262
=====================================
Net earnings per share-
basic $1.75 $1.64 $.42
=====================================
Net earnings per share-
diluted $1.71 $1.60 $.40
=====================================
</TABLE>
Weighted average options to purchase 75,000 and 37,808 shares of
common stock were outstanding at December 31, 1999 and 1998, 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,
-----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash paid for
Interest $27,837 $27,400 $29,010
Income taxes 3,725 3,924 2,500
</TABLE>
Supplemental Schedule of Noncash Investing and
Financing Activities
The subsidiary bank acquired other real estate owned through
foreclosure in settlement of loans or accepted deeds in lieu of foreclosures
on real estate loans in the amount of $1,111,000, $724,000 and $732,000
during the years ended December 31, 1999, 1998 and 1997, respectively.
Dividends declared and unpaid on common stock at December 31, 1999,
1998 and 1997 were $806,000, $737,000 and $613,000, respectively.
NOTE 5-Cash and Due From Banks
The Federal Reserve Bank requires the subsidiary bank to maintain
average reserve balances. Reserves (in the form of deposits with the Federal
Reserve Bank) of $1,000,000 were maintained to satisfy Federal regulatory
requirements at December 31, 1999 and 1998. These reserves are included in
cash and due from banks in the consolidated statements of financial
condition.
<PAGE> 38
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, 1999
US Government agency obligations $ 13,007 $ 482 $ 12,525
Other corporate obligations 5,010 303 4,707
-------------------------------------------------
Total securities held to maturity $ 18,017 $ 0 $ 785 $ 17,232
================================================
Securities available for sale
At December 31, 1999
US Treasury obligations $ 19,988 $ 43 $ 20,031
US Government agency obligations 105,454 $3,428 102,026
Other corporate obligations 71,824 27 2,427 69,424
Mortgage-backed securities:
FNMA 4,772 20 44 4,748
FHLMC 1,526 1 22 1,505
GNMA 870 40 910
SBA 397 2 1 398
-------------------------------------------------
Total mortgage-backed securities 7,565 63 67 7,561
Mutual Funds 7,149 47 172 7,024
Marketable equity securities 10,693 909 2,096 9,506
-------------------------------------------------
Total securities available for sale $222,673 $1,089 $8,190 $215,572
================================================
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
=================================================
</TABLE>
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.
<PAGE> 39
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, 1999 and 1998, 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>
1999 1998 1997
--------------------- --------------------- ---------------------
Realized Realized Realized Realized Realized Realized
Gain Loss Gain Loss Gain Loss
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities
Debt securities $ 317 $ 39 $ 23 $ 166 $1,018
Marketable equity securities 1,157 727 4,162 3,039
-----------------------------------------------------------------------
$1,474 $766 $4,185 $ 0 $3,205 $1,018
=======================================================================
</TABLE>
At December 31, 1999, U. S. Treasury and U. S. Government Agency
Obligations with carrying values of $86,192,000 and estimated market values
of $85,710,000 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, 1999. 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, 1999
Securities held to maturity
US Government agency obligations $13,007 $ 13,007
Other corporate obligations 5,010 5,010
------------------------------------------------------------------
Total debt securities held to maturity $ 0 $ 0 $18,017 $ 0 $ 18,017
==================================================================
Securities available for sale
US Treasury obligations $12,501 $ 7,487 $ 19,988
US Government agency obligations 97,481 $ 7,973 105,454
Other corporate obligations 54,545 4,399 $12,880 71,824
Mortgage-backed securities 17 994 6,554 7,565
------------------------------------------------------------------
Total debt securities available for sale $12,518 $160,507 $12,372 $19,434 $204,831
==================================================================
Estimated Market Value
At December 31, 1999
Securities held to maturity
US Government agency obligations $12,525 $ 12,525
Other corporate obligations 4,707 4,707
------------------------------------------------------------------
Total debt securities held to maturity $ 0 $ 0 $17,232 $ 0 $ 17,232
==================================================================
Securities available for sale
US Treasury obligations $12,531 $ 7,500 $ 20,031
US Government agency obligations 94,485 $ 7,541 102,026
Other corporate obligations 53,091 4,215 $12,118 69,424
Mortgage-backed securities 17 976 6,568 7,561
------------------------------------------------------------------
Total debt securities available for sale $12,548 $156,052 $11,756 $18,686 $199,042
==================================================================
</TABLE>
<PAGE> 40
NOTE 7-Loans
Loans consist of the following at:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Commercial, financial and
agricultural $ 41,837 $ 48,418
Real estate-residential 356,368 328,243
Real estate-commercial 136,566 146,093
Real estate-construction and
land development 3,886 2,281
Installment 5,952 7,809
Other 24,085 22,855
---------------------
Total loans 568,694 555,699
Less:
Unearned income (1,248) (1,506)
Allowance for possible loan
losses (7,032) (7,122)
---------------------
Net loans $560,414 $547,071
=====================
</TABLE>
Included in real estate-residential loans in the table above are
multi-family real estate loans of $39,477,000 and $36,184,000, respectively
at December 31, 1999 and 1998.
At December 31, 1999 and 1998, loans which were on nonaccrual status
were $1,516,000 and $3,013,000, 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, 1999, 1998
and 1997, was $157,000, $441,000 and $767,000, respectively. Interest income
recognized on nonaccrual loans in 1999, 1998 and 1997 amounted to $49,000,
$145,000 and $413,000, 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 $489,000 and $1,556,000, respectively, at December 31,
1999 and 1998. The average recorded investment in impaired loans was
$1,052,000, $3,502,000 and $3,001,000, respectively, in 1999, 1998 and 1997.
No income was recognized on impaired loans during 1999, 1998 and 1997. Total
cash collected on impaired loans during 1999, 1998 and 1997 was $779,000,
$710,000 and $779,000, respectively, all of which was credited to the
principal balance outstanding on such loans.
The allowance for possible loan losses associated with impaired loans
was $252,000, $233,000, $1,054,000 and $457,000 at December 31, 1999, 1998,
1997 and 1996, respectively. During 1999, 1998 and 1997, provisions for
possible loan losses applicable to impaired loans were $30,000, $201,000 and
$983,000, respectively. Impaired loans charged off during 1999, 1998 and
1997 were $11,000, $1,022,000 and $386,000, respectively. At December 31,
1999 and 1998, 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 real
estate loans, commercial real estate loans, commercial, financial and
agricultural 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,
financial and agricultural 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, 1999 and 1998, the subsidiary bank serviced real
estate loans sold to others in the amounts of $137,977,000 and $148,024,000,
respectively.
NOTE 8-Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $7,122 $ 7,651 $ 6,253
Provision for possible loan
losses 50 1,125 2,425
Loans charged off (559) (2,113) (1,205)
Recoveries of loans previously
charged off 419 459 178
------------------------------
Balance at end of year $7,032 $ 7,122 $ 7,651
==============================
</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 $8,572,000 and $9,622,000 at December 31, 1999 and
1998, respectively. During 1999, $2,613,000 of new loans were made
<PAGE> 41
and repayments totaled $3,119,000. Approximately $544,000 of related party
loans at December 31, 1998 were loans to officers and directors who were no
longer associated with the Company in those capacities at December 31, 1999.
NOTE 10-Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Bank buildings $15,728 $15,496
Leasehold improvements 1,689 1,697
Furniture and equipment 11,892 11,077
-------------------
29,309 28,270
Less: Accumulated depreciation
and amortization 15,381 13,528
-------------------
13,928 14,742
Land 3,037 2,791
Construction in progress 2 167
-------------------
$16,967 $17,700
===================
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1999, 1998 and 1997 was $1,959,000, $1,994,000 and $1,911,000, respectively.
During 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 was closed. The charge to earnings
is reflected in occupancy and equipment expense in 1998.
NOTE 11-Other Real Estate Owned
A summary of other real estate owned follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Condominiums and apartment projects $ 55 $ 131
Single family housing projects 794 739
Non-retail commercial 691 756
Residential 235 451
-----------------
1,775 2,077
Less:Valuation allowance 487 476
-----------------
$1,288 $1,601
=================
</TABLE>
An analysis of other real estate owned follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,601 $1,905 $ 3,492
Other real estate owned
acquired 1,111 724 732
Advances for construction
and other 18
Sales proceeds (1,324) (921) (2,376)
Gains (losses) on sales, net 46 (54) 64
Provisions for loss
subsequent to foreclosure (146) (53) (25)
------------------------------
Balance at end of year $ 1,288 $1,601 $ 1,905
==============================
</TABLE>
An analysis of other real estate owned expense follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Foreclosure and holding costs, net $ 259 $250 $102
Provision for loss subsequent to
foreclosure 146 53 25
(Gains) losses on sales, net (46) 54 (64)
-----------------------
$ 359 $357 $ 63
=======================
</TABLE>
Changes in the valuation allowance for other real estate owned were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 476 $468 $528
Provision for loss 146 53 25
Charge offs, net (135) (45) (85)
-----------------------
Balance at end of year $ 487 $476 $468
=======================
</TABLE>
<PAGE> 42
NOTE 12-Other Assets
A summary of other assets follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Cash surrender value of life insurance $10,148 $ 4,744
Accrued interest receivable 5,767 5,722
Net deferred tax assets 5,074 1,701
Goodwill, net of accumulated
amortization of $2,290,000 in 1999
and $2,044,000 in 1998 1,392 1,638
Mortgage servicing rights, net of accum-
ulated amortization of $1,145,000 in
1999 and $987,000 in 1998 401 390
Prepaid expenses 927 980
Other 1,053 2,491
-------------------
$24,762 $17,666
===================
</TABLE>
Mortgage servicing rights of $169,000, $262,000 and $114,000, were
capitalized during 1999, 1998 and 1997. Amortization expense on mortgage
servicing rights was $158,000, $203,000 and $118,000 in 1999, 1998 and 1997,
respectively.
Amortization expense on goodwill was $246,000 during each of the years
1999, 1998 and 1997.
NOTE 13-Interest Bearing Deposits
Interest bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
NOW accounts $195,833 $203,068
Savings accounts 85,770 87,150
Money market deposit accounts 17,516 19,659
Time certificates 256,103 266,901
---------------------
$555,222 $576,778
=====================
</TABLE>
Maturities of time certificates after December 31, 1999 are
$221,919,000 in 2000, $20,645,000 in 2001, $9,219,000 in 2002, $2,443,000 in
2003, $1,325,000 in 2004 and $552,000 in years thereafter.
Time certificates with balances of $100,000 or more at December 31,
1999 and 1998 totaled $34,268,000 and $33,545,000, 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, 1999 and 1998, totaled $75,042,000 and
$70,905,000, respectively. Such borrowings were collateralized at December
31, 1999 by a portion of the Company's U.S. Treasury and U.S. Government
agency securities with a carrying value of $84,184,000 and estimated market
value of $83,753,000 (see note 6 of Notes to Consolidated Financial
Statements). The collateral is maintained under the control of the Company
in a separate custodial account at the FHLBB. The weighted average interest
rate on those borrowings was 4.82% and 4.29%, respectively, at December 31,
1999 and 1998.
The maximum amount of securities sold under agreements to repurchase
at any month end during 1999, 1998 and 1997, were $75,042,000, $73,392,000
and $67,693,000, respectively. The average amount of securities sold under
agreements to repurchase in 1999, 1998 and 1997 were $65,078,000,
$67,562,000 and $59,826,000, respectively. The average cost of securities
sold under agreements to repurchase was 4.08%, 4.36% and 4.76% during 1999,
1998 and 1997, respectively.
Other Borrowings
The Company's subsidiary bank maintains a line of credit with the
FHLBB to meet short or long-term financing needs that may arise. Short and
long-term borrowings from the FHLBB are secured by a blanket lien on
substantially all unencumbered interest-earning assets and FHLBB stock held.
The Company's subsidiary bank is able to commingle, encumber or dispose of
any collateral held subject to its ability to maintain specific "qualifying"
collateral levels in excess of collateral maintenance requirements and meet
minimum capital ratios, both of which were met as of December 31, 1999 and
1998.
Based upon "qualifying" collateral held, the Company's subsidiary bank
had a total borrowing capacity with the FHLBB as of December 31, 1999 of
approximately $335,679,000, of which approximately $245,116,000 was still
available.
Other borrowings, all of which were with the FHLBB, consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1999
---------------------
Range of
Amount Rates (%)
------ ---------
($ In Thousands)
<S> <C> <C>
Due within one year $ 48 5.00-6.17
Due from one to three years 106 5.00-6.17
Due over three years 90,409 4.18-6.17
-------
$90,563
=======
<CAPTION>
December 31, 1998
---------------------
Range of
Amount Rates (%)
------ ---------
($ 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
=======
</TABLE>
<PAGE> 43
Principal payments due on other borrowings after December 31, 1999 are
$48,000 in 2000, $51,000 in 2001, $55,000 in 2002, $30,058,000 in 2003,
$61,000 in 2004 and $60,290,000 in years thereafter. The FHLBB has the right
to call and require the repayment of $30,000,000 of borrowings during 2001,
$20,000,000 of which is at an interest rate of 4.49% maturing in 2008 and
$10,000,000 of which is at an interest rate of 5.58% maturing in 2009.
Additionally, the FHLBB has the right to call and require the repayment of
$20,000,000 of borrowings during 2000, which is at an interest rate of 4.18%
maturing in 2013.
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, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
-------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk
Commitments to originate loans $10,361 $18,886
Unused lines and standby letters
of credit 38,729 38,490
Unadvanced portions of construction
loans 2,175 1,767
</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.
Derivative Financial Instruments
The Company uses 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 $266,000
and $325,000 at December 31, 1999 and 1998, 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 1999, 1998 and 1997.
At December 31, 1999 and 1998 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>
Investment in Limited Partnerships
At December 31, 1999, the subsidiary bank was committed to invest an
additional $1,035,000 in two real estate development limited partnerships
related to low income housing. The investments will be $208,000 in 2000,
$198,000 in 2001, $187,000 in 2002, $177,000 in 2003, $166,000 in 2004 and
$99,000 thereafter. At December 31, 1999 and 1998, the Company had $334,000
and $400,000, respectively, invested in such partnerships, which are
included in other assets in the consolidated statements of financial
condition.
<PAGE> 44
Lease Commitments
As of December 31, 1999, the Company was obligated under noncancelable
operating leases for premises. Minimum future rentals under leases are as
follows:
<TABLE>
<CAPTION>
Amount
------
(In Thousands)
<S> <C>
Year Ending December 31,
2000 $ 385
2001 262
2002 220
2003 199
2004 201
Thereafter 866
------
$2,133
======
</TABLE>
Rent expense amounted to $537,000, $537,000 and $510,000 for the years
ended December 31, 1999, 1998 and 1997, 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.
Income tax expense (benefit) reflected in the consolidated statements
of earnings for years ended December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Federal:
Current $4,010 $4,476 $ 1,947
Deferred 405 341 34
Effect of change in
valuation allowance (1,277)
State:
Current 856 703
Deferred 7 (384)
-----------------------------
$5,278 $5,136 $ 704
=============================
</TABLE>
The above amounts include a tax provision on securities transactions
of $278,000, $1,616,000 and $845,000, in 1999, 1998 and 1997, respectively.
The income tax benefit related to the exercise of nonstatutory stock
options reduces taxes currently payable and is credited to additional paid-
in capital. Such amounts were $153,000 in 1999, $1,152,000 in 1998 and
$290,000 in 1997.
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>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Computed "expected" Federal
income tax expense at
statutory rate $5,237 $4,996 $ 1,024
Increase (decrease)
resulting from:
State income tax, net of
Federal tax benefit 570 211
Low income/rehabilitation
tax credits (320)
Performance based stock
options 367
Nondeductible merger-
related charges 611
Change in valuation
allowance (1,277)
Other (209) (71) (21)
-----------------------------
$5,278 $5,136 $ 704
=============================
</TABLE>
<PAGE> 45
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $2,066 $2,428
Other real estate owned 75 74
Federal net operating loss
carryforwards 436 580
Accrued interest 104 132
Core deposit intangibles 79 101
Deferred compensation 59 65
Marketable equity securities 39 49
Restricted stock awards 129
Low income-housing partnerships 83
Unrealized loss on securities
available for sale 2,789
Other 120 153
-----------------
5,979 3,582
Less: Valuation allowance 0 0
-----------------
Total deferred tax assets 5,979 3,582
-----------------
Deferred tax liabilities:
Unearned income 703 674
Deferred loan fees 93 140
Unrealized gains on securities
available for sale 996
Mortgage servicing rights 109 71
-----------------
Total deferred tax liabilities 905 1,881
-----------------
Net deferred tax asset $5,074 $1,701
=================
</TABLE>
At December 31, 1999 and 1998, net deferred tax assets includes
$2,789,000 in deferred tax assets and $996,000, in deferred tax liabilities,
respectively, which are attributable to the tax effects of net unrealized
losses at December 31, 1999 and net unrealized gains at December 31, 1998 on
securities available for sale. Pursuant to SFAS No. 115 and SFAS No. 109,
the corresponding credit or charge, respectively, has been made directly to
stockholders' equity.
As of December 31, 1999 the Company has net operating loss
carryforwards available for tax purposes of approximately $1,281,000, 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 2000.
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. Prior
to 1997, management believed that uncertainty existed with respect to future
realization of a portion of its net operating loss carryforwards and had
established a valuation allowance. In view of taxable income generated
during 1997 and upon management's evaluation of the likelihood of
realization, the valuation allowance was reversed in 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, 1999 and 1998 (the most
recent actuarial valuations):
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, in-
cluding vested benefits of $2,420,000
and $2,425,000, respectively $2,482 $2,502
=================
Projected benefit obligation, beginning of
period $3,217 $2,800
Service costs-benefits earned during
the period 202 176
Interest cost on projected benefit
obligation 222 194
Actuarial (gain) loss recognized during
the period (162) 187
Annuity payments made during the
period (77) (76)
Settlements occurring during the
period (52) (64)
-----------------
Projected benefit obligation, end of period $3,350 $3,217
-----------------
Plan assets at fair value, beginning of
period, primarily fixed income and
equity securities $3,167 $3,221
Return on plan assets during the
period 437 44
Employer contributions during the
period 207 42
Annuity payments made during the
period (77) (76)
Settlements occurring during the period (52) (64)
-----------------
Plan assets at fair value, end of period,
primarily fixed income and equity
securities $3,682 $3,167
-----------------
Plan assets in excess of (less than)
projected benefit obligation $ 332 $ (50)
Unrecognized net gain from past
experience different from that
assumed and effects of changes in
assumptions (727) (389)
Unrecognized net liability being
recognized over approximately
12 years 78 134
-----------------
Accrued pension cost $ (317) $ (305)
=================
</TABLE>
<PAGE> 46
Net periodic pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service cost-benefits earned during
the period $ 202 $ 176 $ 151
Interest cost on projected benefit
obligation 222 194 184
Expected return on plan assets (259) (254) (217)
Net amortization and deferral 53 2 18
-------------------------
Net periodic pension expense $ 218 $ 118 $ 136
=========================
</TABLE>
The weighted average discount rate of 8.00% in 1999, 6.50% in 1998 and
7.25% in 1997, and the rate of increase in future compensation levels of
5.50% in 1999, 4.50% in 1998 and 5.00% in 1997, 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
The Company sponsors a SERP, and in connection therewith, maintains a
Rabbi Trust, which purchases life insurance policies to satisfy its benefit
obligations thereunder. During 1999 the SERP was amended and certain
additional officers became participants in the SERP. Additional life
insurance policies were purchased during 1999 to fund the additional benefit
obligations. The cash surrender value of these life insurance policies was
$6,227,000 and $1,430,000 at December 31, 1999 and 1998, 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, 1999,
1998 and 1997 amounted to $605,000, $257,000 and $257,000, respectively.
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 $6,000, $9,000 and $17,000,
respectively, for the years ended December 31, 1999, 1998 and 1997.
Compensation expense related to the ESOP amounted to $287,000,
$308,000 and $321,000, respectively, for the years ended December 31, 1999,
1998 and 1997 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 1999, 1998
and 1997.
The total shares held by the ESOP were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---- ----
<S> <C> <C>
Allocated shares 329,926 322,448
Unallocated shares 5,663 11,314
-------------------
Total ESOP shares 335,589 333,762
===================
</TABLE>
The fair value of unallocated shares at December 31, 1999 and 1998 was
$113,000 and $266,000, 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:
<PAGE> 47
Fixed Stock Option Plans
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
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 520,468 $17.06 584,600 $11.39 490,331 $ 5.80
Granted 25,250 21.44 195,250 19.64 283,918 16.93
Exercised (14,017) 6.37 (257,880) 6.26 (189,024) 5.20
Canceled (500) 23.88 (1,502) 8.91 (625) 9.90
------- -------- --------
Options at end of year 531,201 $17.54 520,468 $17.06 584,600 $11.39
======= ====== ======== ====== ======== ======
Options exercisable at year end 198,315 $15.85 82,861 $11.13 305,600 $ 6.28
======= ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------------------------------------
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 13,000 2.3 $ 3.33 13,000 $ 3.33
$6.33 to $7.52 10,427 4.1 6.99 10,427 6.99
$8.29 to $9.10 3,288 5.5 8.79 3,288 8.79
$11.09 to $11.40 4,498 5.8 11.40 4,498 11.40
$13.93 988 7.0 13.93 988 13.93
$17.00 399,250 7.8 17.00 150,328 17.00
$21.44 25,250 9.7 21.44 0 N/A
$23.88 74,500 8.0 23.88 15,786 23.88
------- -------
$3.33 to $23.88 531,201 7.6 $17.54 198,315 $15.85
======= === ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Performance-Based Stock Option Plans
Year Ended December 31,
----------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
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 19,506 $11.23 66,787 $11.09 103,616 $11.06
Exercised (16,514) 11.27 (46,809) 11.02 (36,331) 11.01
Canceled (472) 10.82 (498) 10.78
------- ------- -------
Options at end of year 2,992 $11.03 19,506 $11.23 66,787 $11.09
======= ====== ======= ====== ======= ======
Options exercisable at year end 2,992 $11.03 19,506 $11.23 66,787 $11.09
======= ====== ======= ====== ======= ======
</TABLE>
The range of exercise prices for the performance-based stock option
plans are $10.78-$11.40, with a remaining weighted average life of 6.4 years
at December 31, 1999.
Under the 1995 Stock Option Plan for Outside Directors and the 1995
Stock Option Plan for Officers, which plans 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
<PAGE> 48
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
1999, 1998 and 1997, were $7.80, $8.64 and $6.55 per option share,
respectively. The fair values of the share grants were estimated on the date
of grant using the Black-Scholes option-pricing model using the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected option lives 7 years 7 years 7.5 years
Expected volatility 30% 37-48% 39%
Risk free interest rate 6.21% 4.99-5.49% 6.96%
Expected dividend yield 2.72% 2.10% 1.74%
</TABLE>
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123 for awards made after July 1,
1995, the Company's net earnings and net earnings per share would have been
reduced to the pro forma amounts indicated below for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
($ In Thousands, except
per share data)
<S> <S> <C> <C> <C>
Net Earnings As Reported $10,125 $9,557 $2,307
Pro forma $ 9,342 $8,370 $2,070
Net Earnings
Per Share:
Basic As Reported $ 1.75 $ 1.64 $ .42
Pro forma $ 1.62 $ 1.44 $ .38
Diluted As Reported $ 1.71 $ 1.60 $ .40
Pro forma $ 1.58 $ 1.40 $ .36
</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. In
1999, 4,500 shares of restricted stock were awarded to certain officers
under the 1997 Long-Term Incentive Stock Benefit Plan with a fair value at
the date of grant of $21.44 per share. At December 31, 1999, restricted
stock awards totaled 51,000 shares of which 15,500 shares were vested.
Shares vest ratably over a period of five years. Compensation expense
applicable to the stock awards was $305,000 and $362,000 in 1999 and 1998,
respectively.
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, 1999 and 1998, the Company and the subsidiary bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1999, 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, 1999 and 1998 are presented in the following
table.
<PAGE> 49
<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, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated $79,501 14.18% $44,855 >/=8.00% N/A
Subsidiary Bank $78,273 13.96% $44,855 >/=8.00% $56,069 >/=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $72,492 12.93% $22,428 >/=4.00% N/A
Subsidiary Bank $71,263 12.71% $22,428 >/=4.00% $33,641 >/=6.00%
Tier I Capital (to Average Assets):
Consolidated $72,492 8.26% $35,100 >/=4.00% N/A
Subsidiary Bank $71,263 8.12% $35,100 >/=4.00% $43,875 >/=5.00%
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%
</TABLE>
Stock Repurchase Program
On August 11, 1998, the Company announced a Stock Repurchase Program
("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, 1999, 199,061 shares had been
repurchased under the Program, with an additional 95,850 shares still
available to be repurchased.
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, 1999 and 1998, 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,
----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Advertising and marketing $ 623 $ 567 $1,210
Amortization 404 474 418
Data processing 340 487 1,101
FDIC deposit insurance
assessments 95 93 82
Postage and freight 529 576 552
Professional fees 398 856 817
Printing and supplies 439 640 726
Telephone 489 552 433
Other 2,274 2,167 2,436
----------------------------
$5,591 $6,412 $7,775
============================
</TABLE>
<PAGE> 50
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, life insurance contracts, deferred tax
assets, 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.
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,
financial and agricultural, 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.
<PAGE> 51
Securities sold under agreements to repurchase
The fair value estimate of securities sold under agreements to
repurchase that mature within ninety days and bear market interest rates
approximates carrying value. For those maturing after ninety days, estimated
fair value is based upon the discounted value of contractual cash flows,
with the discount rate based on rates currently offered for borrowings of
similar maturities.
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, 1999 and
1998, because most mature within one year, do not present any unanticipated
credit concerns and bear market interest rates.
The fair values of the interest rate cap agreements are based on
dealer quotes.
The following presents the carrying value and estimated fair value of
the Company's financial instruments at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1999 1998
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 18,575 $ 18,575 $ 23,506 $ 23,506
Interest bearing deposits in other banks 4,402 4,402 19,532 19,532
Securities held to maturity 18,017 17,232 22,277 22,548
Stock in Federal Home Loan Bank of Boston 7,201 7,201 7,201 7,201
Securities available for sale 215,572 215,572 219,765 219,765
Net loans 560,414 558,837 547,071 554,886
Loans held for sale 479 479 1,828 1,828
Mortgage servicing rights 401 773 390 643
Accrued interest receivable 5,767 5,767 5,722 5,722
Financial Liabilities
Deposits (with no stated maturity) 371,915 371,915 383,586 383,586
Time deposits 256,103 256,086 266,901 269,129
Securities sold under agreements to repurchase 75,042 75,057 70,905 70,905
Other borrowings 90,563 87,616 80,608 80,579
Accrued interest payable 1,347 1,347 1,288 1,288
<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 $ 51,265 $ 0 $59,143 $ 0
Interest rate cap agreements 20,000 273 20,000 122
</TABLE>
<PAGE> 52
NOTE 24-Condensed Parent Company Only Financial Information
Condensed financial statements of Granite State Bankshares, Inc. (the
"Parent Company"), as of December 31, 1999 and 1998, and for the years ended
December 31, 1999, 1998 and 1997, are as follows:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Assets
Interest bearing deposits in subsidiary bank $ 2,117 $ 3,948
Investment in subsidiary bank, at equity 69,140 69,590
Other assets 7 3
-------------------
$71,264 $73,541
===================
Liabilities $ 895 $ 941
Stockholders' equity 70,369 72,600
-------------------
$71,264 $73,541
===================
</TABLE>
Statements of Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenues
Interest income from subsidiary bank $ 47 $ 83 $ 29
Dividend income from subsidiary bank 5,250 2,250 3,000
Other revenues 465
-----------------------------
Total revenues 5,297 2,798 3,029
Operating expenses 47 83 254
-----------------------------
Earnings before income taxes and equity in undistributed earnings (loss) of subsidiary bank 5,250 2,715 2,775
Income tax expense (benefit) 161 (68)
-----------------------------
Earnings before equity in undistributed earnings (loss) of subsidiary bank 5,250 2,554 2,843
Equity in undistributed earnings (loss) of subsidiary bank 4,875 7,003 (536)
-----------------------------
Net earnings $10,125 $9,557 $2,307
=============================
</TABLE>
<PAGE> 53
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $10,125 $ 9,557 $ 2,307
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiary bank (4,875) (7,003) 536
Gains on sales of other assets (465)
(Increase) decrease in other assets (4) (1) 228
Increase (decrease) in other liabilities (80) 127 (22)
Deferred income tax expense (benefit) 68 (68)
-------------------------------
Net cash provided by operating activities 5,166 2,283 2,981
-------------------------------
Cash flows from investing activities:
(Increase) decrease in interest bearing deposits with subsidiary bank 1,831 (1,448) (1,781)
Proceeds from sales of other assets 465
-------------------------------
Net cash provided by (used in) investing activities 1,831 (983) (1,781)
-------------------------------
Cash flows from financing activities:
Dividends paid on common stock (3,185) (2,824) (1,285)
Proceeds from issuance of common stock 2,042 426
Reissuance of common stock from treasury 275 88
Purchase of common stock for treasury (4,052) (289) (305)
Repayment on liability relating to ESOP (35) (36) (36)
Purchase of common stock relating to restricted stock awards (281)
-------------------------------
Net cash used in financing activities (6,997) (1,300) (1,200)
-------------------------------
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 Comprehensive Income and Statements
of Stockholders' Equity are identical to the Consolidated Statements of
Comprehensive Income and 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> 54
NOTE 25-Summary of Quarterly Results (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -------------------------------------
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 $11,411 $11,290 $11,290 $11,296 $11,447 $11,515 $11,595 $11,275
Securities available for sale 3,121 2,896 2,920 2,983 2,739 2,542 2,099 2,455
Securities held to maturity 289 288 289 382 380 321 248 520
Interest bearing deposits in other banks 303 341 137 95 373 349 226 81
Dividends on Federal Home Loan Bank
of Boston stock 123 117 117 114 116 115 114 116
-----------------------------------------------------------------------------
Total interest and dividend income 15,247 14,932 14,753 14,870 15,055 14,842 14,282 14,447
-----------------------------------------------------------------------------
Interest expense
Deposits 5,236 5,159 5,213 5,263 5,589 5,664 5,533 5,768
Other borrowed funds 1,938 1,818 1,570 1,699 1,588 1,497 1,096 918
-----------------------------------------------------------------------------
Total interest expense 7,174 6,977 6,783 6,962 7,177 7,161 6,629 6,686
-----------------------------------------------------------------------------
Net interest and dividend income 8,073 7,955 7,970 7,908 7,878 7,681 7,653 7,761
Provision for possible loan losses 0 0 0 50 350 250 225 300
-----------------------------------------------------------------------------
Net interest and dividend income
after provision for possible loan
losses 8,073 7,955 7,970 7,858 7,528 7,431 7,428 7,461
Net gains on sales of securities available
for sale 13 404 286 5 1,805 481 800 1,099
Other noninterest income 1,211 1,247 1,188 1,109 1,290 1,254 1,173 1,148
Noninterest expense<F1> 5,540 5,455 5,475 5,446 7,221 5,560 5,565 5,859
-----------------------------------------------------------------------------
Earnings before income taxes 3,757 4,151 3,969 3,526 3,402 3,606 3,836 3,849
Income tax expense 1,106 1,504 1,412 1,256 1,193 1,276 1,325 1,342
-----------------------------------------------------------------------------
NET EARNINGS<F1> $ 2,651 $ 2,647 $ 2,557 $ 2,270 $ 2,209 $ 2,330 $ 2,511 $ 2,507
=============================================================================
Net earnings per share-basic<F2> $ .46 $ .46 $ .44 $ .39 $ .38 $ .40 $ .43 $ .44
Net earnings per share-diluted<F2> $ .45 $ .45 $ .43 $ .38 $ .37 $ .39 $ .42 $ .42
Annualized Returns
Return on average assets 1.20% 1.22% 1.21% 1.07% 1.03% 1.12% 1.27% 1.29%
Return on average stockholders' equity 14.44% 14.53% 13.96% 12.58% 11.93% 12.74% 14.02% 14.63%
<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 $1,472,000 in the fourth quarter of 1998.
<F2> Net earnings per share is calculated by dividing net earnings by the
average common shares outstanding for each quarter. Therefore, the sum
of net earnings per share for the quarters may not equal net earnings
per share for the year.
</FN>
</TABLE>
<PAGE> 55
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At or for Years Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
($ In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $867,677 $878,147 $813,670 $797,840 $728,724
Net loans 560,414 547,071 500,082 434,184 416,979
Loans held for sale 479 1,828 1,068 1,025 1,985
Investments<F1> 240,790 249,243 219,791 273,230 218,229
Deposits 628,018 650,487 648,983 609,667 591,123
Securities sold under agreements to repurchase 75,042 70,905 66,025 64,961 49,958
Other borrowings 90,563 80,608 25,877 59,190 28,499
Stockholders' equity 70,369 72,600 66,914 59,429 54,755
Operating Data:
Interest and dividend income $ 59,802 $ 58,626 $ 59,011 $ 54,430 $ 51,798
Interest expense 27,896 27,653 28,900 27,243 25,018
----------------------------------------------------
Net interest and dividend income 31,906 30,973 30,111 27,187 26,780
Provision for possible loan losses 50 1,125 2,425 1,372 3,337
Net gains on sales of securities available for sale 708 4,185 2,187 650 338
Other noninterest income 4,755 4,865 4,912 5,081 4,703
Noninterest expense<F2> 21,916 24,205 31,774 22,640 24,364
----------------------------------------------------
Earnings before income taxes 15,403 14,693 3,011 8,906 4,120
Income taxes 5,278 5,136 704 1,705 1,638
----------------------------------------------------
Net earnings<F2> $ 10,125 $ 9,557 $ 2,307 $ 7,201 $ 2,482
====================================================
Per share data:
Net earnings per share-basic $ 1.75 $ 1.64 $ .42 $ 1.35 $ .46
====================================================
Net earnings per share-diluted $ 1.71 $ 1.60 $ .40 $ 1.28 $ .44
====================================================
Cash dividends declared on common stock $ .56 $ .50 $ .29 $ .20 $ .18
Financial Ratios:
Return on average assets 1.18% 1.17% .29% .95% .35%
Return on average stockholders' equity 13.88% 13.30% 3.57% 12.88% 4.56%
<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> 56
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, 2000 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, 1999. 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 23, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FINANCIAL DATA SCHEDULE - FISCAL YEAR ENDED 1999
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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,575
<INT-BEARING-DEPOSITS> 4,402
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 215,572<F1>
<INVESTMENTS-CARRYING> 18,017
<INVESTMENTS-MARKET> 17,232
<LOANS> 567,446<F2>
<ALLOWANCE> 7,032
<TOTAL-ASSETS> 867,677
<DEPOSITS> 628,018
<SHORT-TERM> 75,042<F3>
<LIABILITIES-OTHER> 3,685
<LONG-TERM> 90,563<F4>
0
0
<COMMON> 6,790
<OTHER-SE> 63,579
<TOTAL-LIABILITIES-AND-EQUITY> 867,677
<INTEREST-LOAN> 45,287
<INTEREST-INVEST> 13,168
<INTEREST-OTHER> 1,347
<INTEREST-TOTAL> 59,802
<INTEREST-DEPOSIT> 20,871
<INTEREST-EXPENSE> 27,896
<INTEREST-INCOME-NET> 31,906
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 708
<EXPENSE-OTHER> 21,916
<INCOME-PRETAX> 15,403
<INCOME-PRE-EXTRAORDINARY> 10,125
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,125
<EPS-BASIC> 1.75
<EPS-DILUTED> 1.71
<YIELD-ACTUAL> 3.94
<LOANS-NON> 1,516
<LOANS-PAST> 4
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,122
<CHARGE-OFFS> 559
<RECOVERIES> 419
<ALLOWANCE-CLOSE> 7,032
<ALLOWANCE-DOMESTIC> 5,653
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,379
<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 $75,042
<F4>Includes other borrowings with the Federal Home Loan Bank of Boston of
$90,563
</FN>
</TABLE>
