<PAGE> 1
1996 ANNUAL REPORT
PORTSMOUTH BANK SHARES, INC.
<PAGE> 2
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CONTENTS
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Page
Financial Highlights........................................ 1
The Company's Business...................................... 1
Management's Discussion and Analysis........................ 5
Quarterly Data.............................................. 10
Selected Five-Year Financial Data........................... 11
Auditors' Report............................................ 12
Consolidated Financial Statements........................... 13
Notes to Consolidated Financial Statements.................. 18
Officers and Directors...................................... 36
<PAGE> 3
<TABLE>
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Financial Highlights
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<CAPTION>
December 31,
---------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Total Assets...................................... $271,569 $267,272
Interest-bearing-deposits with another bank....... 53,982 55,458
Loans............................................. 101,417 77,852
Investments....................................... 105,304 123,433
Deposits.......................................... 198,148 195,570
Stockholders' equity.............................. 66,077 67,776
Net interest and dividend income.................. 10,043 10,862
Net income........................................ 5,957 6,041
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</TABLE>
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of Portsmouth Bank Shares, Inc. is traded in the
over-the-counter market, and quoted by the National Association of Securities
Dealers Automated Quotation Nasdaq National Market under the symbols "POBS". It
was first offered on February 17, 1988 at $7.50 per share. At February 10, 1997
the closing price per share was $15.75. At December 31, 1996 there were
approximately 1,044 holders of record of Common Stock. The following table sets
forth, quarterly, the high and low closing prices of the Company's Common Stock
on the Nasdaq National Market, together with the cash dividends paid in each
period.
<TABLE>
<CAPTION>
1996 1995
------------------------------ --------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTERQUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- -------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends declared
per share......... $ .40 $ .15 $ .15 $ .15* $ .40 $ .13 $ .13 $ .12*
Stock Price
High........... $15.13 $14.00 $14.75 $15.50 $15.50 $14.25 $12.25 $12.22
Low............ $12.88 $12.63 $13.00 $13.75 $13.50 $11.62 $11.00 $11.25
*Plus a 2 % Stock Dividend
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</TABLE>
THE COMPANY'S BUSINESS
Portsmouth Bank Shares, Inc. ("Portsmouth" or the "Company") is the parent
holding company of Portsmouth Savings Bank (the "Bank").
The Company conducts its business primarily through the Bank, its
wholly-owned subsidiary. The principal business of the Bank is attracting
deposits from the general public and investing in residential and commercial
real estate loans, consumer loans and a portfolio of conservative investments.
On February 13, 1997 Portsmouth Bank Shares, Inc. and CFX Corporation (CFX)
signed a definitive agreement under which CFX will acquire Portsmouth and the
Bank.
The Bank, an FDIC-insured savings institution, was organized in 1823 and
is the oldest state-chartered savings bank in New Hampshire. It operates through
its
1
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principal office at 333 State Street, Portsmouth, New Hampshire, and two branch
offices in Greenland and North Hampton, New Hampshire. The Bank's lending
activities and depositor base extend into Strafford County, New Hampshire and
York County, Maine. At December 31, 1996 the Bank had a total regulatory capital
ratio of 40.59%, which exceeds the 8% FDIC requirement. At December 31, 1996,
the Bank's ratio of net worth to assets was 24.33%.
The Bank's lending policies focus on loan quality and close monitoring of
the loan portfolio by management. The Board of Directors reviews significant
loan applications prior to approval. The Bank maintains a large investment
portfolio and its investment policies stress safety and liquidity. In order to
protect its net interest margin against significant fluctuations, the Bank
seeks, where possible, to better match the interest rate sensitivity and
maturities of its assets and liabilities.
The Bank's investment policy emphasizes liquidity and preservation of
capital. The Board of Directors participates with management in all significant
investment decisions. Investments are primarily in short-term, liquid assets in
order to minimize the effects on its portfolio of changes in interest rates.
The excess of the Bank's interest-earning assets maturing or repricing
within one year over its interest-bearing liabilities maturing or repricing
within one year (the "gap") was a positive $59.9 million (23.2%) of earning
assets at December 31, 1996. In making this calculation, the Bank assumes that
approximately 15% of its regular savings, money markets and NOW accounts reprice
within one year. The Bank regularly, at least monthly, reviews and evaluates its
asset-liability (gap) position and policy guidelines. Quarterly, the Bank
consults with its independent investment advisor, reviewing the policy
guidelines and means to better match interest sensitive assets and liabilities
within the policy guidelines. In setting the guidelines for the policy's time
horizons, the following are the major factors considered: 1) projected interest
rates; 2) run-off or growth of "Core Deposits" (regular savings, money market
and NOW accounts); 3) competitive restraints to rate changes; 4) historical
trends; 5) availability of qualified investments at acceptable rates and
maturities; 6) maintaining a diversified asset mix and 7) lack of brokered
deposits. The Bank has in recent years significantly increased its investments
in U.S. Treasury and government agency securities, as well as corporate
securities. Offsetting this increase, interest-bearing deposits with other banks
have declined substantially and outstanding loan balances have diminished. This
change in asset-liability strategy reflects a continued weak local economy. The
Bank is currently writing substantially all of its newly originated fixed-rate
mortgage loans to meet the requirements for sale in the secondary market. No
sales in the secondary market were made in 1996.
The Bank currently competes for both deposits and loans with many other
savings banks, commercial banks, savings and loan associations and credit unions
with offices in and around the Portsmouth area. The Bank maintains its market
position by offering very competitive rates for deposits and loans as well as a
full complement of banking services and other retail financial services for
individuals and small businesses.
LENDING ACTIVITIES. At December 31, 1996, the Bank's loan portfolio
totaled $101.4 million, representing approximately 51.2% of the Bank's $198.1
million total deposits at that date. The principal categories of loans in the
Bank's portfolio are residential real estate loans secured by 1-4 family
residences, 63%; commercial real estate loans secured by multi-family
residential and commercial properties, 18%; and consumer and other loans, which
comprise 19% of the portfolio.
2
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Under regulations promulgated by the Bank Commissioner of New Hampshire
(the "Commissioner"), the Bank may not make any loan to one borrower, as
defined, which exceeds a limit which at December 31, 1996, amounted to $19.8
million. At that date, the Bank's largest single borrower had aggregate loans
outstanding of $2.6 million.
The Bank offers adjustable-rate mortgage loans as part of a strategy to
originate loans that are more interest-rate sensitive than traditional
fixed-rate mortgage loans. At December 31, 1996, adjustable-rate loans
(primarily residential mortgage loans) comprised 39.3% or $34.8 million of the
total loan portfolio. Another aspect of the asset-liability management effort
has been a policy of writing newly- originated fixed-rate residential mortgage
loans to meet the requirements for sale in the secondary market. A substantial
amount ($42.1 million) of fixed-rate mortgage loans are carried in the
portfolio. During periods of rising interest rates, the market value of
fixed-rate loans may decline. Presently management has no intention of disposing
of any significant portion of its fixed-rate mortgage loan portfolio, any such
disposition may result in the realization of losses, thereby affecting the net
worth and net income of the Bank.
At December 31, 1996, the portfolio of residential mortgage loans totaled
$62.2 million, consisting of 1,331 loans. The average size of such loans was
$46,952. The adjustable-rate loans currently offered by the Bank have terms of
up to 30 years and an interest rate that adjusts every one, three or five years
in accordance with an index based on securities issued by the United States
Government. There is an annual 2% cap on any increase in interest rates, as well
as an overall "life time" cap equal to 6%. The Bank has not engaged in the
practice of using a cap on the loan payments, which could allow the loan balance
to increase rather than decrease, resulting in negative amortization. Although
the Bank may for competitive reasons offer discounts on the interest on its
adjustable-rate residential mortgage loans for up to five years, the Bank
evaluates a borrower's ability to pay at or above the initial contract rate.
The origination of adjustable-rate mortgage loans reduces the risks
associated with changes in interest rates, but such loans involve other risks,
because as interest rates increase the underlying payments by the borrower also
increase, thus increasing the potential for default. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. These risks have not had any adverse effect on the Bank to date.
Commercial real estate loans are primarily secured by existing properties,
such as apartment buildings and, to a lesser extent, office buildings,
industrial buildings, warehouses and various special purpose properties. At
December 31, 1996, the Bank had $18.2 million of such loans in its portfolio,
the largest outstanding balance of which was $2.3 million. Although terms vary,
commercial real estate loans secured by existing properties generally have
maturities of 15 years or less and interest rates that are tied to the N.Y.
prime rate are generally adjustable.
The Bank offers both secured and unsecured personal loans, as well as
automobile, boat, home improvement, collateral and government guaranteed
education loans. Consumer loans generally have maturities of up to ten years. At
December 31, 1996, the Bank's portfolio of consumer and other loans totaled $6.2
million, representing 7.01% of all loans. Consumer loans generally have shorter
terms and higher interest rates than first mortgage loans.
NON-PERFORMING ASSETS AND DELINQUENT LOANS. The Bank's lending policy
focuses on loan quality and close monitoring of the loan portfolio by
management. As a result of this lending policy, the Bank has experienced minimal
loan charge-offs and delinquencies. For the year 1996, the Bank had net
charge-offs of $40,000. At December 31, 1996, the Bank had five non-performing
loans in its $101.4 million loan portfolio totaling $576,000. While the Bank has
generally been able to work out satisfactory repayment schedules with delinquent
borrowers, the Bank will undertake foreclosure or other legal proceedings if a
loan delinquency is not otherwise
3
<PAGE> 6
satisfactorily resolved. Real estate acquired as a result of foreclosure action
amounted to $100,492 at December 31, 1996, a decrease of $568,000 since December
31, 1995. The properties are being actively marketed.
INVESTMENT ACTIVITIES. The Bank's investment policy emphasizes liquidity
and preservation of capital. The Board of Directors participates with management
in all significant investment decisions and is counseled by a professional
independent investment adviser. As part of its asset-liability restructuring
program, the Bank maintains a sizeable investment portfolio amounting to $105.3
million or 38.8% of its total assets at December 31, 1996. The Bank invests in
United States government and agency obligations, corporate bonds that are of
investment grade or higher and in conservative income-oriented equity
securities. The Bank's equity portfolio had amortized cost and fair values of
$14.9 million and $15.9 million, respectively, at December 31, 1996. The balance
of the Bank's investment securities had amortized cost and fair market values of
$88.3 million and $89.3 million, respectively. The Bank's investment in
interest-bearing deposits with the Federal Home Loan Bank (the "FHLB") totaled
$54.0 million at December 31, 1996 as call provisions were exercised by the
issuers of agency obligations. These deposits amounted to $55.5 million at
December 31, 1995.
In addition to providing liquidity and opportunities to enhance the
repricing characteristics of the Bank's earning assets, the investment portfolio
provides an important source of recurring income. For the years ended December
31, 1996 and 1995, the Bank's investment portfolio generated 61.0% and 63.5%,
respectively, of total interest and dividend income. The Bank's investment
portfolio earned 7.42% on taxable investment securities and 3.86% on tax-exempt
securities in 1996, while earning 7.02% and 4.77%, respectively, on such
securities in 1995. The Bank's interest-bearing deposits with the FHLB earned
5.29% in 1996 and 5.91% in 1995. It is management's intent to hold securities on
a long-term basis or until maturity; however, securities may be traded whenever
the opportunity is presented so long as it is consistent with our investment
policy and the categorization of the portfolio for financial reporting purposes.
SOURCES OF FUNDS. Deposits obtained through the Company's banking offices
have traditionally been the principal source of funds for use in lending and for
other general business purposes. To a lesser extent, funds are also derived from
amortization and prepayments of outstanding loans and maturities of investment
securities.
The Bank's current deposit products include passbook savings and club
accounts, demand accounts, NOW accounts, money market deposit accounts and
certificates of deposit ranging in terms from three months to three years.
Included among these deposit products are Individual Retirement Account
Certificates and Keogh Retirement Certificates (collectively "retirement
accounts"). In recent years market conditions have required the Bank to increase
its emphasis on short-term certificate accounts and other types of deposit
accounts that are more responsive to changes in market interest rates.
Deposits of the Bank totaled $198.1 million or 73.0% of its total assets
at December 31, 1996.
Deposit account interest rates are priced to be competitive with other
financial institutions conducting business in its market area. The ability of
the Bank to attract and maintain deposits and control the Bank's overall cost of
funds has been and will continue to be significantly affected by economic and
competitive conditions.
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This financial review of Portsmouth Bank Shares, Inc. is intended to
broaden the understanding of the Company's financial condition and operating
results. This section should be read in conjunction with the Company's
consolidated financial statements, related notes and supplementary financial
data.
As a financial services organization, the Company should be reviewed in
terms of the trends in its cash flows and changes in financial condition, the
yields on earning assets and the cost of interest-bearing liabilities. The
results of operations are largely dependent upon net interest income, which is
the difference between income from interest and fees on loans plus income on
investments, less interest expense on deposits. Interest income is a function of
the average balance of loans and investments outstanding during the period and
the average rates earned. Interest expense is a function of the average balance
of deposits outstanding during the period and the average rates paid on such
deposits. Income is also affected by the level of non-interest income and
expenses.
FINANCIAL CONDITION
At December 31, 1996, the Company's total assets were $271,569,000
compared to $267,272,000 at December 31, 1995, an increase of $4,297,000 or
1.61%. The increase in assets reflects the gradual recovery of the economy in
our market area. The Company perceives considerable evidence, coupled with a
concurrent increase in deposits, that this recovery may continue. Loans
increased as a percentage of total assets as the Company experienced attractive
lending opportunities in the local area. At December 31, 1996, loans totalled
$101,417,000 or 37.3% of total assets compared to $77,852,000 or 29.1% of total
assets at December 31, 1995. Investment securities declined as a percentage of
total assets due primarily to early calls of these securities, the Company's
decision to seek to redeploy a portion of the proceeds in loans rather than in
investments and the relative lack of similar investments. At December 31, 1996
investment securities totalled $105,304,000 or 38.8% of total assets compared to
$123,433,000 or 46.2% of total assets at December 31, 1995. The Company's
asset/liability management investment strategy is to hold securities until
maturity unless market conditions change significantly. At December 31, 1996 the
carrying value of Investment securities included net appreciation of $2,070,000
in accordance with provisions of SFAS No. 115.
Stockholders' equity was $66,077,000 at December 31, 1996 or 24.3% of
total assets, compared to $67,776,000 or 25.4% of total assets, at December 31,
1995. Dividends paid in 1996 to stockholders amounted to $4,869,000 or 81.7% of
net income. Stockholders equity at December 31, 1996 includes $1,271,000 which
reflects the after-tax effect of net unrealized holding gain on available-for-
sale securities in accordance with SFAS No. 115. This amount reflects a decrease
of $2,307,000 from December 31, 1995, which was responsible for the entire
decrease in stockholders' equity over the same period.
Management is not aware of any trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or results of operations. The agreement which
provides for the acquisition of the Company and the Bank by CFX, Inc. requires
the Bank to operate in accordance with past practices.
5
<PAGE> 8
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
Management seeks to assure that the Bank has adequate liquidity to meet
the cash requirements of customers and to maintain an appropriate balance
between interest-sensitive assets and liabilities. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to achieve
consistent growth of net interest income through periods of changing interest
rates by maintaining an appropriate balance between interest-sensitive assets
and liabilities.
The Company has a policy of closely managing its liquidity position as
part of its program to better match its asset and liability maturities. By
actively administering its interest rate sensitivity position, the Company seeks
to protect and improve its net interest income through periods of changing
rates. At December 31, 1996 the Company's one year interest sensitivity position
is asset sensitive with a one year cumulative sensitivity gap, as a percent of
earning assets, of 23.2%, compared with a gap of 12.7% at December 31, 1995. The
gap increased 10.5 percentage points during 1996 due to the fact that new
commercial paper loans of $13 million are included in the 0-3 mos category.
<TABLE>
The following table depicts the Company's interest rate sensitivity at
December 31, 1996.
<CAPTION>
Sensitivity Period
-----------------------------------------------------------
Beyond
0-3 mos 6 mos 1 year 1-3 years 3 years Total
------- -------- ------- --------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans ....................$22,863 $ 8,119 $ 9,065 $ 8,660 $52,710 $101,417
Investments................76,482 15,528 9,019 9,985 46,200 157,214
------- ------- -------- -------- ------- --------
Total..................$99,345 $23,647 $ 18,084 $ 18,645 $98,910 $258,631
======= ======= ======== ======== ======= ========
Interest-bearing liabilities:
Deposits..................$20,242 $29,293 $ 31,519 $ 55,024 $62,070 $198,148
Long term debt (other
liabililties)................ 24 24 48 339 1,832 2,267
------- ------- -------- -------- ------- --------
Total..................$20,266 $29,317 $ 31,567 $ 55,363 $63,902 $200,415
======= ======= ======== ======== ======= ========
Period sensitivity gap......$79,079 $(5,670) $(13,483) $(36,718) $35,008 $ 58,216
Cumulative sensitivity gap..$79,079 $73,409 $ 59,926 $ 23,208 $58,216 $ 58,216
Cumulative sensitivity gap
as a percentage of total
earning assets............ 30.6% 28.4% 23.2% 9.0% 22.5%
</TABLE>
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<TABLE>
The following average balance sheets present for the periods indicated the
total dollar amount of interest income from earning assets and the resultant
yields as well as the interest paid on interest-bearing liabilities, expressed
both in dollars and rates:
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans................ $ 85,247 $ 7,141 8.38% $ 77,414 $ 6,768 8.74% $ 78,940 $ 6,716 8.51%
Interest-bearing
deposits with
other banks........ 56,565 2,992 5.29 29,971 1,770 5.91 22,240 904 4.06
Taxable investment
securities......... 106,286 7,884 7.42 139,330 9,777 7.02 147,658 9,982 6.76
Tax-exempt
investment
securities......... 7,385 285 3.86 4,840 231 4.77 10,314 354 3.43
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................. 255,483 18,302 7.16 251,555 18,546 7.37 259,152 17,956 6.93
Non-interest-earning
assets................. 9,311 9,562 10,332
-------- -------- --------
Total.............. $264,794 $261,117 $269,484
======== ======== ========
Interest-bearing
liabilities:
Regular savings.... $46,356 $ 1,255 2.71 $ 50,259 $ 1,348 2.68 $ 60,245 $ 1,616 2.68
NOW accounts....... 24,099 391 1.62 21,688 371 1.71 22,052 388 1.76
Money market
accounts........... 24,084 752 3.12 26,508 815 3.07 35,394 966 2.73
Time certificates
of deposit........ 102,760 5,656 5.50 96,299 4,957 5.15 86,072 3,081 3.58
-------- ------- -------- ------- -------- -------
Total interest-
bearing
deposits.......... 197,299 8,054 4.08 194,754 7,491 3.85 203,763 6,051 2.97
Long-term debt..... 2,627 205 7.80 2,720 193 7.10 2,778 196 7.06
-------- ------- -------- ------- -------- -------
Total interest-
bearing
liabilities....... 199,926 8,259 4.13 197,474 7,684 3.89 206,541 6,247 3.02
Non-interest-bearing
liabilities............ 663 594 870
Net worth................ 64,205 63,049 62,073
-------- -------- --------
Total.............. $264,794 $261,117 $269,484
======== ======== ========
Net interest income/
interest rate spread... $10,043 3.03% $10,862 3.48% $11,709 3.91%
======= ==== ======= ==== ======= ====
Net earning balance/net
yield on interest
earning assets......... $ 55,557 3.93% $ 54,081 4.32% $ 52,611 4.52%
- ------------------
</TABLE>
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<TABLE>
The following table presents the dollar amount of changes in interest
income and expense for each major component of interest earning assets and
interest bearing liabilities, and the amount of change attributable to changes
in average balances and average rates for the periods indicated. The net change
attributable to changes in both volume and rate, which cannot be segregated, has
been allocated proportionately to the change due to volume and the change due to
the rate.
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
Volume Rate Net Volume Rate Net
------- ----- ------ ----- ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on loans $ 679 $(306) $ 373 $(133) $ 185 $ 52
Interest income on interest-
bearing deposits with
other banks 1,573 (351) 1,222 391 475 866
Interest income on (2,197) 358 (1,839) (755) 427 (328)
------- ----- ------ ----- ------ ------
investments
Total interest-earning assets $ 55 $(299) $ (244) $(497) $1,087 $ 590
======= ===== ====== ===== ====== ======
Interest expense on deposits $ 105 $ 458 $ 563 $(347) $1,787 $1,440
Interest expense on long-term
debt (7) 19 12 (4) 1 (3)
------- ----- ------ ----- ------ ------
Total interest-bearing
liabilities $ 98 $ 477 $ 575 $(351) $1,788 $1,437
======= ===== ====== ===== ====== ======
</TABLE>
INTEREST RATE SPREADS
<TABLE>
The following schedule sets forth the weighted average yield on
interest-earning assets, the weighted average interest rate paid on
interest-bearing liabilities, and the interest rate spread for the years
indicated.
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Yield on loans 8.38% 8.74% 8.51% 9.03% 9.40%
Yield on investments (including
short-term investments)(1) 6.56 6.76 6.23 6.12 6.45
Weighted average yield on
interest-earning assets 7.16 7.37 6.93 7.02 7.43
Weighted average rate on interest-
bearing liabilities 4.13 3.89 3.02 3.35 4.47
Interest rate spread(2) 3.03 3.48 3.91 3.67 2.96
- ---------
(1) Includes federal funds sold, certificates of deposit and Federal Home
Loan Bank-overnight deposit.
(2) Interest rate spread is the difference between the yield on
interest-earning assets and the rate on interest-bearing liabilities.
</TABLE>
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RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
General. Net income for the comparable periods remained constant,
$5,957,000 for 1996 versus $6,041,000 for 1995. Net interest income for 1996 was
$10,043,000, a decrease of $819,000 or 7.5% when compared to $10,862,000 for
1995. There was no provision for loan losses in 1996 or 1995. Other income
(primarily investment securities gains) increased $662,000 and other expense
decreased $80,000 (primarily due to a decrease in FDIC insurance premiums).
Net Interest Income. The decrease in net interest income reflects the
continued low level of interest rates. The increase in total average
interest-bearing assets of $3,928,000 reflects substantial changes in the
composition thereof. Average balances of taxable investment securities declined
$33,044,000 due primarily to early calls exercised by the issuer. The Bank
aggressively competed for alternative investment vehicles and did in fact
increase the average balance of non-taxable investment securities $2,545,000,
the average balance of loans by $7,833,000, and the year-end balance of loans by
$23,565,000. Still, the average balance of interest-bearing deposits with other
banks increased $26,594,000 since the substantial increase in loans took place
late in the year. Yields on total interest-bearing assets averaged 7.16% for
1996 compared to 7.37% for 1995, a decrease of 21 basis points. Total average
interest-bearing liabilities increased $2,452,000 to $199,926,000. The increase
in average time certificates of deposit of $6,461,000 and the increase in the
average rate paid on these deposits of 35 basis points is indicative of a very
competitive market place. Net transfers from our day of deposit accounts also
contributed to increased deposit costs during 1996. The interest rate spread of
3.03% at December 31, 1996 reflects a decline of 45 basis points from 3.48% at
December 31, 1995.
Provision for Loan Losses. The zero provision for 1996 and 1995 reflects
management's evaluation of the excellent credit quality within the loan
portfolio. Management is not aware of any trends or uncertainties which would
materially impact results of future operations or materially increase
nonperforming loans.
Other Income and Expense. Other income increased $662,000 to $1,888,000 at
December 31, 1996. Investment securities gains constituted $590,000 of this
increase and, service charges on deposit accounts and other income comprised the
remainder of $72,000. Other expenses totaled $3,527,000 compared to $3,607,000,
a reduction of $80,000. The major components of this reduction were a decrease
in FDIC insurance premiums of $252,000, partially offset by an increase in
general and administrative expenses of $152,000 due to the normal course of
business.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
General. Net income for the year ended December 31, 1995 amounted to
$6,041,000 compared to $5,872,000 for the year 1994, an increase of $169,000 or
2.9%. Net interest income totaled $10,862,000, a decrease of $846,000 or 7.2%
when compared to $11,708,000 for 1994. There was no provision for loan losses in
1995 or 1994. Other income was up $723,000 and the other expense decreased
$428,000.
Net Interest Income. The decrease in net interest income is due in part to
the general decline of interest rates during 1995. This decline led to early
calls of investment securities, proceeds from which were invested at lower
short-
9
<PAGE> 12
term rates. The decline in the average balance of taxable investment securities
of $8,328,000 and the increase in the average balance of interest-bearing
deposits with other banks of $7,731,000 demonstrated this point. The other major
factor contributing to the decrease in net interest income was the $10,227,000
increase in the average balance of time certificates of deposits and its rate
increase of 157 basis points. The average balance increase reflects in part
transfers from our day of deposit accounts, for which these monies had already
been invested. The increase in the average rate paid is attributable to rate
increases implemented in 1994. Consequently, the rates move down slowly as term
certificates mature. The interest rate spread declined 43 basis points, from
3.91% in 1994 to 3.48% in 1995.
Provision for Loan Losses. The zero provision for 1995 and 1994 reflects
management's evaluation of the excellent credit quality within the loan
portfolio. Management is not aware of any trends or uncertainties which would
materially impact results of future operations.
Other Income and Expense. Other income totaled $1,226,000, an increase of
$723,000 compared to 1994. This increase is due to investment securities gains,
primarily from issues called. Other expenses decreased $428,000 from the 1994
level of $4,035,000 or 10.6%. The reduction is comprised of a reduction in
F.D.I.C. insurance premiums of $246,000 and general and administrative expenses
of $301,000, partially offset by an increase in salaries and employee benefits
of $119,000.
Impact of Inflation. The Consolidated Financial Statements and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on operations of the Bank is
reflected in increased operating costs. 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 price of goods and services.
<TABLE>
QUARTERLY DATA
CONSOLIDATED QUARTERLY INCOME SUMMARY
<CAPTION>
1996 Quarters 1995 Quarters
------------------------------ ------------------------------
First Second Third Fourth First Second Third Fourth
------ ------ ------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend
income.................... $4,499 $4,534 $4,600 $4,669 $4,600 $4,635 $4,684 $4,627
Interest expense............ 2,008 2,020 2,026 2,205 1,600 1,837 1,965 2,282
------ ------ ------ ------ ------ ------ ------ ------
Net interest and dividend
income.................... 2,491 2,514 2,574 2,464 3,000 2,798 2,719 2,345
Provision for loan losses... 0 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------ ------
Net interest and dividend
income after provision
for loan losses........... 2,491 2,514 2,574 2,464 3,000 2,798 2,719 2,345
Other income................ 534 340 349 665 67 258 68 833
Other expense............... 921 868 831 907 1,024 1,004 806 774
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.. 2,104 1,986 2,092 2,222 2,043 2,052 1,981 2,404
Income taxes................ 643 551 638 615 596 606 591 646
------ ------ ------ ------ ------ ------ ------ ------
Net income.................. $1,461 $1,435 $1,454 $1,607 $1,447 $1,446 $1,390 $1,758
====== ====== ====== ====== ====== ====== ====== ======
Primary earnings per share* $ 0.25 $ 0.24 $ 0.24 $ 0.27 $ 0.25 $ 0.25 $ 0.25 $ 0.26
====== ====== ====== ====== ====== ====== ====== ======
* 1995 earnings adjusted for 2% Stock Dividend issued March 15, 1996
</TABLE>
10
<PAGE> 13
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
FINANCIAL CONDITION DATA
<CAPTION>
December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total assets ..................... $271,569 $267,272 $261,155 $276,339 $293,956
Interest-bearing deposits with
other banks .................... 53,982 55,458 9,133 33,177 36,012
Net loans ........................ 100,042 76,451 78,684 79,291 93,088
Investment securities ............ 105,304 123,434 154,906 150,184 150,593
Total interest-bearing deposits .. 198,148 195,570 195,396 210,519 230,890
Stockholder's equity ............. 66,077 67,776 62,715 62,228 59,656
<CAPTION>
OPERATING DATA
Year Ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans .......$ 7,141 $ 6,768 $ 6,716 $ 7,576 $ 8,880
Interest and dividend income ..... 11,161 11,778 11,240 11,588 11,629
------- ------- -------- -------- --------
Total interest and dividend
income ....................... 18,302 18,546 17,956 19,164 20,509
Interest expense ................... 8,259 7,684 6,247 7,467 10,565
------- ------- -------- -------- --------
Net interest and dividend income ... 10,043 10,862 11,709 11,697 9,944
Provision for loan losses .......... 0 0 0 71 201
------- ------- -------- -------- --------
Net interest and dividend income
after provision for loan losses .. 10,043 10,862 11,709 11,626 9,743
Other income:
Investment securities gains ...... 1,529 939 204 255 485
Other ............................ 359 287 299 495 279
Total other income ............. 1,888 1,226 503 750 764
Other expense ...................... 3,527 3,608 4,035 4,285 4,654
------- ------- -------- -------- --------
Income before taxes ................ 8,404 8,480 8,177 8,091 5,853
Income tax ......................... 2,447 2,439 2,305 1,952 1,385
------- ------- -------- -------- --------
Net income .................... $ 5,957 $ 6,041 $ 5,872 $ 6,139 $ 4,468
======= ======= ======= ======== ========
Interest rate spread ............... 3.03% 3.48% 3.91% 3.67% 2.96%
Net yield on interest earning
assets ........................... 3.93% 4.32% 4.52% 4.28% 3.78%
Return on average assets ........... 2.25% 2.31% 2.18% 2.14% 1.57%
Return on average equity ........... 9.28% 9.58% 9.21% 9.85% 7.76%
Equity to asset ratio .............. 24.33% 25.36% 24.01% 22.52% 20.29%
</TABLE>
11
<PAGE> 14
SHATSWELL, MacLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
83 PINE STREET
WEST PEABODY, MASSACHUSETTS 01960-3635
(508) 535-0206
The Board of Directors
Portsmouth Bank Shares, Inc.
Portsmouth, New Hampshire
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of Portsmouth Bank
Shares, Inc. and Subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 consolidated financial position of
Portsmouth Bank Shares, Inc. and Subsidiary as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" as of January 1, 1994.
/s/ Shatswell, MacLeod & Company, P.C.
---------------------------------------
Shatswell, MacLeod & Company, P.C.
West Peabody, Massachusetts
January 13, 1997, except for Note 20,
as to which the date is February 13, 1997
12
<PAGE> 15
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
<TABLE>
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 1996 and 1995
--------------------------
<CAPTION>
ASSETS 1996 1995
- ------ ------------ ------------
<S> <C> <C>
Cash and due from banks $ 6,149,250 $ 5,466,275
Federal Home Loan Bank-overnight deposit 53,982,431 55,458,074
------------ ------------
Cash and cash equivalents 60,131,681 60,924,349
Investments in available-for-sale securities
(at fair value) 92,417,042 102,443,893
Investments in held-to-maturity securities
(fair values of $11,984,001 as of December 31, 1996
and $19,962,825 as of December 31, 1995) 12,012,607 20,114,782
Federal Home Loan Bank stock, at cost 874,200 874,200
Loans, net 100,042,318 76,451,313
Premises and equipment 885,804 895,334
Accrued interest receivable 1,838,352 2,338,047
Other real estate owned 100,347 668,149
Other assets 3,266,909 2,561,917
------------ ------------
$271,569,260 $267,271,984
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Savings and NOW deposits $ 93,106,451 $ 93,512,876
Time deposits 105,041,278 102,056,758
------------ ------------
Total deposits 198,147,729 195,569,634
Due to broker 4,440,927
Other liabilities 2,904,060 3,926,718
------------ ------------
Total liabilities 205,492,716 199,496,352
------------ ------------
Stockholders' equity:
Preferred stock, par value $.10 per share,
authorized 15,000,000 shares; unissued
Common stock, par value $.10 per share,
authorized 25,000,000 shares; issued
6,496,271 shares in 1996 and 6,362,748
shares in 1995; outstanding, 5,711,421
shares in 1996 and 5,622,898 shares in 1995 649,627 636,275
Paid-in capital 33,423,099 31,645,954
Retained earnings 37,097,092 37,696,064
Treasury stock, at cost (784,850 shares in 1996
and 739,850 shares in 1995) (6,363,875) (5,780,750)
Net unrealized holding gain on
available-for-sale securities 1,270,601 3,578,089
------------ ------------
Total stockholders' equity 66,076,544 67,775,632
------------ ------------
$271,569,260 $267,271,984
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 16
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 7,140,707 $ 6,767,588 $ 6,716,216
Interest and dividends on investment securities:
Taxable 6,761,002 8,571,283 8,850,019
Tax-exempt 284,610 230,799 353,982
Dividends on equity securities 1,123,602 1,205,761 1,131,484
Federal Home Loan Bank and other interest 2,992,308 1,770,076 904,023
----------- ----------- -----------
Total interest and dividend income 18,302,229 18,545,507 17,955,724
----------- ----------- -----------
Interest expense:
Interest on deposits 8,054,941 7,490,954 6,051,025
Other interest expense 204,586 192,729 196,265
----------- ----------- -----------
Total interest expense 8,259,527 7,683,683 6,247,290
----------- ----------- -----------
Net interest and dividend income 10,042,702 10,861,824 11,708,434
----------- ----------- -----------
Other income:
Service charges on deposit accounts 103,024 100,449 102,184
Investment securities gains, net 1,529,267 939,167 203,710
Other income 255,364 186,471 197,344
----------- ----------- -----------
Total other income 1,887,655 1,226,087 503,238
----------- ----------- -----------
Other expense:
Salaries and employee benefits 2,059,357 2,040,323 1,921,197
Occupancy expense 307,498 312,209 331,136
Equipment expense 276,553 276,052 321,181
Loss on sales of other real estate owned, net 28,058 7,125 8,599
Writedown on other real estate owned 6,825 24,087 44,973
FDIC insurance premiums 2,000 254,062 500,299
Other expense 846,221 693,527 907,409
----------- ----------- -----------
Total other expense 3,526,512 3,607,385 4,034,794
----------- ----------- -----------
Income before income taxes 8,403,845 8,480,526 8,176,878
Income taxes 2,446,500 2,439,314 2,305,128
----------- ----------- -----------
Net income $ 5,957,345 $ 6,041,212 $ 5,871,750
=========== =========== ===========
Earnings per share:
Primary shares outstanding 5,954,937 5,962,729 6,000,640
=========== =========== ===========
Net income per share $ 1.00 $ 1.01 $ .98
=========== =========== ===========
Fully diluted shares outstanding 5,958,005 5,993,499 6,011,717
=========== =========== ===========
Net income per share $ 1.00 $ 1.01 $ .98
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 17
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<CAPTION>
Net
Unearned Unrealized
Compensation Holding Gain
Employee (Loss) On
Stock Available-
Common Paid-in Retained Treasury Ownership For-Sale
Stock Capital Earnings Stock Plan Securities
-------- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $414,028 $30,415,448 $35,453,477 $(3,907,525) $(147,199) $
Net income 5,871,750
Payment of principal on
Employee Stock Ownership
Plan loan 73,600
Purchase of treasury stock (1,025,125)
Dividends declared (4,021,787)
Issuance of common stock 2,381 137,503
Stock split (3 for 2) 207,497 (207,497) (1,813)
Net unrealized holding gain
on adoption of SFAS
No. 115 as of January 1, 1994 5,849,980
Net change in unrealized
holding gain on available-
for-sale securities
(6,399,648)
-------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1994 623,906 30,345,454 37,301,627 (4,932,650) (73,599) (549,668)
Net income 6,041,212
Payment of principal on
Employee Stock Ownership
Plan loan 73,599
Purchase of treasury stock (848,100)
Dividends declared (4,394,351)
Stock dividends declared 11,087 1,236,178 (1,252,424)
Issuance of common stock 1,282 64,322
Net change in unrealized
holding loss on available-
for-sale securities 4,127,757
-------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1995 636,275 31,645,954 37,696,064 (5,780,750) 3,578,089
Net income 5,957,345
Purchase of treasury stock (583,125)
Dividends declared (4,868,833)
Stock dividends declared 11,201 1,669,024 (1,687,484)
Issuance of common stock 2,151 108,121
Net change in unrealized
holding gain on available-
for-sale securities (2,307,488)
-------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1996 $649,627 $33,423,099 $37,097,092 $(6,363,875) $ 0 $ 1,270,601
======== =========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 18
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,957,345 $ 6,041,212 $ 5,871,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in cash surrender value (122,221) (253,091) (154,501)
Depreciation and amortization 59,048 92,630 136,563
Deferred tax expense (benefit) 19,906 6,918 (21,704)
Decrease in taxes payable (61,646) 191,469 (293,037)
(Increase) decrease in interest receivable 499,695 944,298 (489,685)
Decrease in interest payable (46) (24,787)
Decrease in accrued expenses (15,342) (84,950) (30,073)
Decrease in prepaid expenses 5,859 5,609 23,769
Increase (decrease) in other liabilities (13,560) 85,456 (37,638)
Increase in other assets (14,458) (44,756) (15,373)
Amortization, net of accretion of investment securities 474,222 770,737 1,284,055
Investment securities gains, net (1,529,267) (939,167) (203,710)
Loss on sales of other real estate owned, net 28,058 7,125 8,599
Writedown of other real estate owned 15,500 24,087 44,973
Change in unearned income 13,100 (59,907) (1,121)
Deferred compensation (64,502) (66,358) (50,502)
------------ ------------ ------------
Net cash provided by operating activities 5,251,737 6,721,266 6,047,578
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales of other real estate owned 36,332 180,259
Proceeds from paydowns on other real estate owned 325
Purchases of available-for-sale securities (22,214,588) (10,379,914) (24,473,610)
Proceeds from sales of available-for-sale securities 6,322,016 11,202,969 15,760,453
Proceeds from maturities of available-for-sale securities 27,682,656 23,276,849 9,256,500
Purchases of held-to-maturity securities (27,604,260) (13,318,749) (30,154,161)
Proceeds from maturities of held-to-maturity securities 35,670,000 32,540,000 17,913,000
Proceeds from exchange of securities 50,000
Net (increase) decrease in loans (23,081,436) 2,504,357 464,843
Recoveries of previously charged-off loans 1,250 1,185
Capital expenditures (49,518) (21,613) (3,972)
------------ ------------ ------------
Net cash provided by (used in) investing activities (3,273,555) 45,891,416 (11,056,688)
------------ ------------ ------------
Cash flows from financing activities:
Fractional shares paid in cash (7,259) (5,159) (1,813)
Purchase of treasury stock (583,125) (848,100) (1,025,125)
Net decrease in NOW and savings accounts (12,844,374) (16,577,174) (10,267,235)
Net increase (decrease) in time deposits 15,422,469 16,750,753 (4,855,289)
Dividends paid (4,868,833) (4,394,351) (4,021,787)
Proceeds from sale of common stock 110,272 65,604 139,884
------------ ------------ ------------
Net cash used in financing activities (2,770,850) (5,008,427) (20,031,365)
------------ ------------ ------------
</TABLE>
16
<PAGE> 19
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
(continued)
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents (792,668) 47,604,255 (25,040,475)
Cash and cash equivalents at beginning of year 60,924,349 13,320,094 38,360,569
----------- ----------- -----------
Cash and cash equivalents at end of year $60,131,681 $60,924,349 $13,320,094
=========== =========== ===========
Supplemental disclosures:
Loans transferred to other real estate owned $ 167,200 $ 42,500 $ 188,762
Origination of loans for sales of other real estate owned 722,900 255,000 45,900
Available-for-sale securities transferred to held-to-maturity
securities 13,082,323
Interest paid 8,259,527 7,683,729 6,272,077
Income taxes paid 2,488,240 2,250,514 2,619,869
Held-to-maturity securities transferred to available-for-sale
securities 4,900,534
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 20
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
Portsmouth Bank Shares, Inc. (Company) is a state chartered corporation that was
organized in 1987 to become the holding company of Portsmouth Savings Bank
(Bank). The Company's primary activity is to act as the holding company for the
Bank. The Bank is a state chartered bank which was incorporated in 1823 and is
headquartered in Portsmouth, New Hampshire. The Bank operates its business from
three banking offices located in New Hampshire. The Bank is engaged principally
in the business of attracting deposits from the general public and investing
those deposits in residential and real estate loans, and in consumer and small
business loans.
NOTE 2 - ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of the Company and Subsidiary conform to
generally accepted accounting principles and predominant practices within the
banking industry. The consolidated financial statements of the Company were
prepared using the accrual basis of accounting. The significant accounting
policies of the Company and its subsidiary are summarized below to assist the
reader in better understanding the consolidated financial statements and other
data contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period.
Actual results could differ from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank. All significant intercompany
accounts and transactions have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks and overnight deposits held at
the Federal Home Loan Bank.
INVESTMENT SECURITIES, IN GENERAL:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts computed on the straight-line method which has
substantially the same effect as using the interest method. Gains or
losses on sales of investment securities are computed on a specific
identification basis.
INVESTMENT SECURITIES, AFTER THE ADOPTION OF SFAS NO. 115:
As of January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS No. 115). The Statement establishes standards
of financial accounting and reporting for investments in equity securities
that have readily determinable fair values and all investments in debt
securities. SFAS No. 115 requires that an enterprise classify debt and
equity securities into one of three categories: held-to-maturity,
available-for-
18
<PAGE> 21
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
sale, or trading. This security classification may be modified after
acquisition only under certain specified conditions. In general,
securities may be classified as held-to-maturity only if the Company has
the positive intent and ability to hold them to maturity. Trading
securities are defined as those bought and held principally for the
purpose of selling them in the near term. All other securities must be
classified as available-for-sale.
-- Held-to-maturity securities are measured at amortized cost in the
balance sheet. Unrealized holding gains and losses are not
included in earnings or in a separate component of capital. They
are merely disclosed in the notes to the consolidated financial
statements.
-- Available-for-sale securities are carried at fair value on the
balance sheet. Unrealized holding gains and losses are not
included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until realized.
-- Trading securities are carried at fair value on the balance sheet.
Unrealized holding gains and losses for trading securities are
included in earnings.
INVESTMENT SECURITIES, PRIOR TO THE ADOPTION OF SFAS NO. 115:
Investments in debt securities were those securities which the Company had
the ability and intent to hold to maturity. Investment securities
(excluding marketable equity securities) were stated at cost. Marketable
equity securities were stated at the lower of cost or fair value in the
aggregate.
LOANS:
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding principal balances reduced by amounts due to borrowers on
unadvanced loans, any charge-offs, the allowance for loan losses and any
deferred fees or costs on originated loans, or unamortized premiums or
discounts on purchased loans.
Interest on loans is generally recognized on a simple interest basis.
Loan origination and commitment fees and certain direct origination costs
are deferred, and the net amount amortized as an adjustment of the related
loan's yield. The Company is generally amortizing these amounts over the
contractual life of the related loans.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of the
cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is deemed
to be fully collectible. When recognition of interest income on an
impaired loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net
carrying amount of the loan at the contractual interest rate. Any cash
interest payments received in excess of the limit and not applied to
reduce the net carrying amount of the loan are recorded as recoveries of
charge-offs until the charge-offs are fully recovered.
19
<PAGE> 22
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
An allowance is available for losses which may be incurred in the future
on loans in the current portfolio. The allowance is increased by
provisions charged to current operations and is decreased by loan losses,
net of recoveries. The provision for loan losses is based on management's
evaluation of current and anticipated economic conditions, changes in the
character and size of the loan portfolio, and other indicators. The
balance in the allowance for possible loan losses is considered adequate
by management to absorb any reasonably foreseeable loan losses.
As of January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118. According to SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The Statement requires that
impaired loans be measured on a loan by loan basis by either the present
value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price, or the fair value of
the collateral if the loan is collateral dependent.
The Statement is applicable to all loans, except large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment,
loans that are measured at fair value or at the lower of cost or fair
value, leases, and convertible or nonconvertible debentures and bonds and
other debt securities. The Company considers its residential real estate
loans and consumer loans that are not individually significant to be large
groups of smaller balance homogeneous loans.
Factors considered by management in determining impairment include payment
status, net worth and collateral value. An insignificant payment delay or
an insignificant shortfall in payment does not in itself result in the
review of a loan for impairment. The Company applies SFAS No. 114 on a
loan-by-loan basis. The Company does not apply SFAS No. 114 to
aggregations of loans that have risk characteristics in common with other
impaired loans. Interest on a loan is not generally accrued when the loan
becomes ninety or more days overdue. The Company may place a loan on
nonaccrual status but not classify it as impaired, if (i) it is probable
that the Company will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is an individually
insignificant residential mortgage loan or consumer loan. Impaired loans
are charged-off when management believes that the collectibility of the
loan's principal is remote. Substantially all of the Company's loans that
have been identified as impaired have been measured by the fair value of
existing collateral.
The financial statement impact of adopting the provisions of this
Statement was not material.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of
are removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated
principally on the straight-line method over the estimated useful lives of
the assets.
20
<PAGE> 23
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance with
Financial Accounting Standards Board Statement No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring." These properties
are carried at the lower of cost or estimated fair value less costs to
sell. Any writedown from cost to estimated fair value required at the time
of foreclosure or classification as in-substance foreclosure is charged to
the allowance for possible loan losses. Expenses incurred in connection
with maintaining these assets, subsequent write-downs and gains or losses
recognized upon sale are included in other expense.
Beginning in 1995, in accordance with Statement of Financial Accounting
Standards No. 114 "Accounting by Creditors for Impairment of a Loan," the
Company classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless of
whether formal foreclosure proceedings take place.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Company's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary differences are
realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. Fair value methods
and assumptions used by the Company in estimating its fair value
disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and federal funds sold approximate those assets' fair
values.
Securities: Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans are estimated by discounting the
future cash flows, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. The carrying
amount of accrued interest approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits,
regular savings, NOW accounts and money market accounts are equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for time deposits are estimated using a discounted
cash flow calculation that applies interest rates currently being offered
on time deposits to a schedule of aggregated expected monthly maturities.
21
<PAGE> 24
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
Commitments to grant loans: The fair value of commitments is estimated,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of
credit is based on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
STOCK BASED COMPENSATION:
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in
October 1995 and introduces a fair value method of accounting for employee
stock options, restricted stock grants, stock appreciation rights or
similar equity instruments. In accordance with SFAS No. 123, entities can
recognize stock-based compensation expense in the basic financial
statements using either (i) the intrinsic value approach set forth in APB
Opinion No. 25 or (ii) the fair value method introduced in SFAS No. 123.
Entities electing to continue to follow the provisions of APB Opinion No.
25 must make pro forma disclosure of net income and earnings per share, as
if the fair value method of accounting defined in SFAS No. 123 had been
applied. Management will continue to measure stock-based compensation
costs in accordance with APB Opinion No. 25.
NOTE 3 - INVESTMENTS IN SECURITIES
- ----------------------------------
<TABLE>
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values are as follows as of December 31:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
December 31, 1996:
Equity securities $14,075,409 $1,093,266 $ 111,124 $ 15,057,551
Debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies 60,828,634 995,985 267,984 61,556,635
Debt securities issued by foreign governments 3,995,235 131,366 4,126,601
Corporate debt securities 10,932,792 192,403 3,978 11,121,217
Mortgage-backed securities 513,281 41,757 555,038
----------- ---------- ---------- ------------
$90,345,351 $2,454,777 $ 383,086 $ 92,417,042
=========== ========== ========== ============
December 31, 1995:
Equity securities $11,297,240 $2,510,257 $ 96,250 $ 13,711,247
Debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies 60,089,595 2,631,689 4,500 62,716,784
Debt securities issued by foreign governments 5,001,557 242,665 5,244,222
Corporate debt securities 19,520,710 505,781 1,445 20,025,046
Mortgage-backed securities 693,926 52,668 746,594
----------- ---------- ---------- ------------
$96,603,028 $5,943,060 $ 102,195 $102,443,893
=========== ========== ========== ============
</TABLE>
22
<PAGE> 25
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
December 31, 1996:
Debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies $10,000,000 $ 9,375 $ 32,164 $ 9,977,211
Corporate debt securities 2,012,607 1,638 7,455 2,006,790
----------- -------- -------- -----------
$12,012,607 $ 11,013 $ 39,619 $11,984,001
=========== ======== ======== ===========
December 31, 1995:
Debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies $14,999,266 $ 1,634 $137,770 $14,863,130
Debt securities issued by states of the United States
and political subdivisions of the states 570,000 570,000
Corporate debt securities 4,545,516 21,165 36,986 4,529,695
----------- -------- -------- -----------
$20,114,782 $ 22,799 $174,756 $19,962,825
=========== ======== ======== ===========
The scheduled maturities of held-to-maturity securities and
available-for-sale securities (other than equity securities) were as follows as
of December 31, 1996:
<CAPTION>
Held-to-maturity Available-for-sale
securities: securities:
--------------------------- ---------------------------
Amortized Amortized
Cost Fair Cost Fair
Basis Value Basis Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Debt securities other than mortgage-backed securities:
Due within one year $ 3,998,362 $ 3,986,665 $15,033,410 $15,134,567
Due after one year through five years 3,000,000 3,003,438 35,230,648 36,274,955
Due after five years through ten years 4,014,245 3,994,835 5,492,603 5,649,936
Due after ten years 1,000,000 999,063 20,000,000 19,744,995
Mortgage-backed securities 513,281 555,038
----------- ----------- ----------- -----------
$12,012,607 $11,984,001 $76,269,942 $77,359,491
=========== =========== =========== ===========
</TABLE>
During 1996, proceeds from sales of available-for-sale securities amounted to
$6,322,016. Gross realized gains on those sales amounted to $978,485. Gross
realized gains on calls of preferred stocks and bonds amounted to $550,782.
During 1995, proceeds from sales of available-for-sale securities amounted to
$11,202,969. Gross realized gains on those sales amounted to $308,515. Gross
realized gains on calls of preferred stocks and bonds amounted to $580,654.
During 1994, proceeds from sales of available-for-sale securities amounted to
$15,760,453. Gross realized gains on those sales amounted to $209,118.
In 1995, the Bank transferred at fair value certain debt securities from
securities classified as held-to-maturity to securities classified as
available-for-sale. The unrealized holding gain of $58,290 at the date of
transfer has been recognized as a separate component of stockholders' equity.
the transfer was a result of a reassessment of the appropriateness of the
classification of all securities held as of December 31, 1995. In accordance
with a Special Report of the Financial Accounting Standards Board regarding SFAS
No. 115 this transfer will not call into question the intent of the Bank to hold
other debt securities to maturity in the future.
23
<PAGE> 26
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
There were no securities of issuers whose aggregate carrying amount exceeded 10%
of stockholders' equity as of December 31, 1996.
A total par value of $1,500,000 of debt securities was pledged to secure public
funds on deposit as of December 31, 1996 and 1995.
<TABLE>
The adoption of SFAS No. 115 as of January 1, 1994 had the following effect on
the consolidated financial statements for the year ended December 31, 1994:
<CAPTION>
Addition to stockholders' equity:
<S> <C>
Net unrealized holding gain on available-for-sale securities $9,530,757
Less tax effect 3,680,777
----------
Net effect $5,849,980
</TABLE> ==========
In 1994, subsequent to the adoption of SFAS No. 115 as of January 1, 1994,
certain available-for-sale securities were transferred at fair value from the
category available-for-sale to the category held-to-maturity. The unrealized
holding losses on such securities are $34,245 and are included in the separate
component of stockholders' equity as of December 31, 1994.
NOTE 4 - LOANS
- --------------
<TABLE>
The carrying amounts of loans consisted of the following as of December 31:
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Commercial, financial and agricultural $ 484,421 $ 423,686
Commercial paper 12,978,067
Real estate - construction and land development 1,276,841 692,722
Real estate - residential 63,568,824 59,142,712
Real estate - commercial 16,929,630 11,572,790
Consumer 6,178,780 6,020,080
------------ -----------
101,416,563 77,851,990
Allowance for possible loan losses (687,396) (726,928)
Unearned income (686,849) (673,749)
------------ -----------
Net loans $100,042,318 $76,451,313
============ ===========
</TABLE>
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 1996.
Total loans to such persons and their companies amounted to $3,070,801 as of
December 31, 1996. During the year ended December 31, 1996, $2,597,959 of new
loans were made and repayments totaled $1,271,714.
<TABLE>
Changes in the allowance for possible loan losses were as follows for the years
ended December 31:
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Balance at beginning of period $726,928 $766,666 $806,862
Loans charged off (40,782) (40,923) (40,196)
Recoveries of loans previously charged off 1,250 1,185
-------- -------- --------
Balance at end of period $687,396 $726,928 $766,666
======== ======== ========
</TABLE>
24
<PAGE> 27
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31:
<CAPTION>
1996 1995
----------------------- -------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Losses
Loans for which there is a related
allowance for credit losses $ 0 $0 $ 0 $0
Loans for which there in no related
allowance for credit losses 0 0 108,825 0
------ -- -------- --
Totals $ 0 $0 $108,825 $0
====== == ======== ==
Average recorded investment in impaired
loans during the year ended December 31 $9,243 $ 69,767
====== ========
Related amount of interest income r
ecognized during the time, in the year
ended December 31, that the loans were
impaired
Total recognized $ 0 $ 0
====== ========
Amount recognized using a
cash-basis method of accounting $ 0 $ 0
====== ========
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
- -------------------------------
<TABLE>
The following is a summary of premises and equipment as of December 31:
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land $ 769,620 $ 769,620
Buildings 2,029,489 2,022,699
Furniture and equipment 1,892,776 1,850,048
---------- ----------
4,691,885 4,642,367
Accumulated depreciation and amortization (3,806,081) (3,747,033)
---------- ----------
$ 885,804 $ 895,334
========== ==========
</TABLE>
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts (including CDs), each with a
minimum denomination of $100,000, was approximately $14,235,391 and $12,437,949
as of December 31, 1996 and 1995, respectively.
<TABLE>
For time deposits as of December 31, 1996, the aggregate amount of maturities
for each of the following three years ended December 31, are:
<CAPTION>
(In thousands)
<S> <C>
1997 $ 84,309
1998 18,137
1999 2,595
--------
$105,041
========
</TABLE>
25
<PAGE> 28
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
NOTE 7 - INCOME TAXES
<TABLE>
The components of the income tax expense are as follows for the years ended
December 31:
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $2,412,750 $2,411,936 $2,310,297
State 13,844 20,460 16,535
---------- ---------- ----------
2,426,594 2,432,396 2,326,832
---------- ---------- ----------
Deferred:
Federal 19,750 5,664 (10,352)
State 156 1,254 (11,352)
---------- ---------- ----------
19,906 6,918 (21,704)
---------- ---------- ----------
Total income tax expense $2,446,500 $2,439,314 $2,305,128
========== ========== ==========
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended
December 31:
<CAPTION>
1996 1995 1994
---- ---- ----
% of % of % of
Income Income Income
------ ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (1.2) (.9) (1.5)
Dividends received deduction (3.1) (3.5) (3.3)
Increase in CSV of life insurance over
premiums paid (.2) (1.0) (.5)
Environmental tax .1 .1
Stock options exercised (.5) (.3) (.7)
Unallowable expenses .2
State tax, net of federal tax benefit .1 .2 .1
---- ---- ----
29.1% 28.8% 28.2%
==== ==== ====
<CAPTION>
The Company had gross deferred tax assets and gross deferred tax (liabilities)
as follows as of December 31:
1996 1995
---- ----
Deferred tax assets:
<S> <C> <C>
Depreciation $ 46,053 $ 34,820
Allowance for loan losses 150,178 163,636
Loan origination fees 233,556 229,102
Accrued expense 6,854 7,714
Accrued deferred compensation 906,219 928,150
Other adjustments 44,179 43,523
--------- ----------
Gross deferred tax assets 1,387,039 1,406,945
--------- ----------
Deferred tax liabilities:
Net unrealized gain on available-for-sale securities (797,459) (2,249,324)
Prepaid pensions (15,408) (15,408)
--------- ----------
Gross deferred tax liabilities (812,867) (2,264,732)
--------- ----------
Net deferred tax asset (liability) $ 574,172 $ (857,787)
========= ==========
</TABLE>
26
<PAGE> 29
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
Deferred tax assets as of December 31, 1996 and 1995 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 1996, the Company had no operating loss and tax credit
carryovers for tax purposes.
In prior years, Portsmouth Savings Bank, a wholly-owned subsidiary of the
Company, was allowed a special tax-basis bad debt deduction under certain
provisions of the Internal Revenue Code. As a result, retained income of the
Bank as of December 31, 1996 includes approximately $4,149,000 for which federal
and state income taxes have not been provided. If the Bank no longer qualifies
as a bank as defined in certain provisions of the Internal Revenue Code, this
amount will be subject to recapture in taxable income ratably over six (6)
years, subject to a combined federal and state tax rate of approximately 30%.
NOTE 8 - STOCK COMPENSATION PLAN
- --------------------------------
As of December 31, 1996, the Company has a fixed option, stock-based
compensation plan, which is described below. The Company applies APB Opinion 25
and related Interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for this plan.
In 1988, the Company adopted an Incentive Stock Option Plan whereby options may
be granted to key employees of the Company or its subsidiary to purchase shares
of common stock at a price not less than fair market value at the date of grant.
The options are exercisable over a period not to exceed ten years from the date
of grant. No additional options are available for issuance. All options were
granted prior to December 31, 1994.
The share amounts and per share option prices have been adjusted to reflect the
1996 and 1995 2% stock dividends and the 1994 three for two stock split.
<TABLE>
A summary of the status of the Company's fixed stock option plan as of December
31, 1996, 1995 and 1994 and changes during the years ending on those dates is
presented below:
<CAPTION>
1996 1995 1994
---------------------- ------------------------- ------------------------
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------- ------ -------------- ------ -------------- ------ --------------
(Share Amounts In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 394 $5.40 407 $5.50 437 $5.44
Exercised (21) $5.12 (13) $4.92 (30) $4.64
--- --- ---
Outstanding at end of year 373 $5.54 394 $5.40 407 $5.50
=== === ===
Options exercisable at year-end 373 394 407
Weighted-average fair value of
options granted during the year N/A N/A N/A
</TABLE>
<TABLE>
The following table summarizes information about fixed stock options outstanding
as of December 31, 1996:
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices as of 12/31/96 Contractual Life Exercise Price as of 12/31/96 Exercise Price
- --------------- -------------- ---------------- -------------- -------------- --------------
<C> <C> <C> <C> <C> <C>
$4.62 to $6.62 372,734 2 years, 9 months $5.54 372,734 $5.54
</TABLE>
27
<PAGE> 30
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN
- --------------------------------------
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers all employees who have attained age 21 and have completed a year of
service. The Company makes annual contributions to the ESOP as determined by the
Board of Directors. The ESOP purchased 68,693 shares of the Company's stock in
the Company's stock offering in 1988. The purchase price was paid by a $515,000
loan from an unrelated third party with repayment secured by the Bank. The loan
balance of $73,599 at December 31, 1994 was paid on February 1, 1995. As the
debt was repaid, shares were released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year. The debt of
the ESOP was recorded as debt of the Company and the shares pledged as
collateral were reported as unearned ESOP shares in the balance sheet. The ESOP
shares were as follows as of December 31:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Total ESOP shares all released for allocation 74,916 81,343
</TABLE>
Any shares of the Company purchased by the ESOP after December 31, 1992 are
subject to the accounting specified by the American Institute of CPA's Statement
of Position 93-6. Under the statement, as any shares purchased after December
31, 1992 are released from collateral, the Company will report compensation
expense equal to the current market price of the shares and the shares will be
outstanding for earnings-per-share computations. Also, as the shares are
released, the related dividends will be recorded as a reduction of retained
earnings. Dividends on the allocated shares will be recorded as a reduction of
debt and accrued interest. No shares of the Company were purchased by the ESOP
in 1996, 1995 or 1994.
NOTE 10 - EMPLOYEE BENEFITS
- ---------------------------
The Company has a qualified defined benefit pension plan covering substantially
all of its full time employees meeting certain eligibility requirements. The
retirement benefit is 1.10% of Average Annual Earnings over three years up to
Social Security Covered Compensation plus 1.73% of Average Annual Earnings over
three years in excess of Social Security Compensation, both multiplied by years
of Credited Service up to a maximum of 30 years.
28
<PAGE> 31
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
The following table sets forth the funded status of the plan and amounts
recognized in the Company's consolidated balance sheets as of December 31:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation (including vested
benefits of $772,942 and $723,675, respectively) $ 794,207 $ 741,748
=========== ===========
Projected benefit obligation for services rendered to date $(1,032,976) $(1,068,772)
Plan assets at contract value, primarily invested in
guaranteed accounts of an insurance company 859,158 827,693
----------- -----------
Plan assets less than projected benefit obligation (173,818) (241,079)
Unrecognized prior service cost 27,746 30,080
Unrecognized obligation existing at January 1, 1987,
being recognized over 15 years (8,926) (10,711)
Unrecognized net loss from past experience different
from that assumed 236,185 304,664
----------- -----------
Prepaid pension cost included in other assets on the
balance sheet $ 81,187 $ 82,954
=========== ===========
</TABLE>
<TABLE>
Net periodic pension cost included the following components for the years ended
December 31:
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service costs-benefits earned during the period $52,532 $68,462 $ 75,827
Interest cost on projected benefit obligation 80,158 69,978 71,251
Actual return on plan assets (32,682) (28,095) (23,501)
Net amortization and deferral (18,823) (15,077) (2,412)
------- ------- --------
Net periodic pension cost $81,185 $95,268 $121,165
======= ======= ========
</TABLE>
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7.5% and 5.0%, respectively for 1996 and 1995. The expected
long-term rate of return on assets was 7.5% for each year.
NOTE 11 - SUPPLEMENTAL PENSIONS AND DEFERRED COMPENSATION
- ---------------------------------------------------------
The Company makes payments to certain retired officers in accordance with
supplemental retirement and deferred compensation agreements. The cost of these
agreements is accrued but not funded. The Company purchased corporate-owned life
insurance policies on the lives of the retirees. The death benefits are payable
to the Company and will assist in the funding of the deferred compensation
liability. The Company will recover the costs of premium payments from the cash
value of these policies.
29
<PAGE> 32
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
NOTE 12 - FINANCIAL INSTRUMENTS
- -------------------------------
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 unadvanced
funds on loans. The instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheets. The contract
amounts of those instruments reflect 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 is represented by
the contractual amounts of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
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 some 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 on
management's credit evaluation of the borrower.
<TABLE>
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of
December 31:
<CAPTION>
1996 1995
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 60,131,681 $ 60,131,681 $ 60,924,349 $ 60,924,349
Available-for-sale securities 92,417,042 92,417,042 102,443,893 102,443,893
Held-to-maturity securities 12,012,607 11,984,001 20,114,782 19,962,825
Federal Home Loan Bank stock 874,200 874,200 874,200 874,200
Loans 100,042,318 100,153,000 76,451,313 76,181,000
Accrued interest receivable 1,838,352 1,838,352 2,338,047 2,338,047
Financial liabilities:
Deposits 198,147,729 198,438,000 195,569,634 196,022,000
</TABLE>
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
<TABLE>
Notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of December 31:
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Commitments to originate loans $1,022,000 $1,868,550
Unadvanced portions of loans:
Residential real estate loans 904,851 339,822
Consumer 272,105 255,980
Home equity 64,464 86,542
Commercial lines of credit 102,002 128,270
---------- ----------
$2,365,422 $2,679,164
========== ==========
</TABLE>
30
<PAGE> 33
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
There is no material difference between the notional amounts and the estimated
fair values of the above off-balance sheet liabilities.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
NOTE 13 - DISTRIBUTION AND LIQUIDATION ACCOUNT
- ----------------------------------------------
Pursuant to certain bank conversion regulations, Portsmouth Savings Bank
established a liquidation account in an amount equal to its net worth
($22,670,000) as of September 30, 1987, for the benefit of eligible account
holders who maintain their deposit accounts in the Bank after conversion. In the
event of a complete liquidation, eligible account holders would be entitled to
their interest in the liquidation account before any liquidation distribution
may be made with respect to common stock. Their interest as to each account will
be in the same proportion of the total liquidation amount as the balance of
their account on December 31, 1987 was of the balance in all accounts in the
Bank on that date. However, if the amount in the savings account on any annual
closing date of the Bank is less than the amount in such account on December 31,
1987, then their interest in the liquidation account will be reduced by an
amount proportionate to any such reduction, and their interest will cease to
exist if such accounts are closed. Their interest in the liquidation account
will never be increased despite any increase in the related account after
December 31, 1987. As of December 31, 1996 and 1995, the balance in the
liquidation account was $866,786 and $1,015,960, respectively.
NOTE 14 - STOCK DIVIDENDS AND EARNINGS PER SHARE
- ------------------------------------------------
Earnings per share is calculated based on the treasury stock method. Earnings
per share for 1996, 1995 and 1994 were calculated using the weighted average
number of shares outstanding during those periods. The number of shares
outstanding during 1996, 1995 and 1994 have been adjusted to reflect the
issuance of a 2% stock dividend declared in March of 1996. Earnings per share,
as restated, for 1995 and 1994 have been reduced by $.02 and $.02, respectively
to reflect the 1996 stock dividend. During 1996 and 1995 the Company paid $7,258
and $5,159, respectively for fractional shares in connection with the stock
dividends. The number of shares outstanding during 1994 were adjusted to reflect
the issuance of a 3 for 2 stock split declared in March of 1994. During 1994 the
Company paid $1,813 for fractional shares in connection with the stock split.
In accordance with Statement of Position 93-6 issued by the American Institute
of CPA's, earnings per share is calculated by using the average number of shares
outstanding reduced by the average number of shares owned by the ESOP that had
not been committed to be released, if any.
NOTE 15 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
- ---------------------------------------------------------
Most of the Bank's business activity is with customers located within the state.
There are no concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in New Hampshire and Southern Maine.
31
<PAGE> 34
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
NOTE 16 - REGULATORY MATTERS
- ----------------------------
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the 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 and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the 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. Their 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 the 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). Management believes, as of December 31,
1996, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company and the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized the Company and the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the institution's category.
<TABLE>
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
-------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $65,493 57.10% $ 9,175 (bigger or equal)8% N/A
Portsmouth Savings Bank 46,547 40.59 9,175 (bigger or equal)8 $11,468 (bigger or equal)10%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 64,806 56.50 4,588 (bigger or equal)4 N/A
Portsmouth Savings Bank 45,860 39.99 4,587 (bigger or equal)4 6,881 (bigger or equal)6
Tier 1 Capital (to Average Assets):
Consolidated 64,806 24.84 10,436 (bigger or equal)4 N/A
Portsmouth Savings Bank 45,860 17.58 10,435 (bigger or equal)4 13,043 (bigger or equal)5
</TABLE>
32
<PAGE> 35
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated $64,925 58.57% $8,868 (bigger or equal)8% N/A
Portsmouth Savings Bank 45,877 41.40 8,866 (bigger or equal)8 $11,082 (bigger or equal)10%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 64,198 57.92 4,434 (bigger or equal)4 N/A
Portsmouth Savings Bank 45,150 40.74 4,433 (bigger or equal)4 6,649 (bigger or equal)6
Tier 1 Capital (to Average Assets):
Consolidated 64,198 24.15 10,635 (bigger or equal)4 N/A
Portsmouth Savings Bank 45,150 16.98 10,634 (bigger or equal)4 13,292 (bigger or equal)5
</TABLE>
NOTE 17 - STOCKHOLDERS' EQUITY
- ------------------------------
The Bank may not declare or pay cash dividends on its shares of common stock if
the effect thereof would cause its stockholders' equity to be reduced below
applicable maintenance requirements or if such declaration and payments would
otherwise violate regulatory requirements. As of December 31, 1996 the amount of
dividends the Bank could declare was approximately $35,425,000.
NOTE 18 - RECLASSIFICATION
- --------------------------
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
33
<PAGE> 36
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
NOTE 19 - PORTSMOUTH BANK SHARES, INC. (PARENT ONLY FINANCIAL INFORMATION)
- --------------------------------------------------------------------------
<TABLE>
Balance sheets
<CAPTION>
December 31,
1996 1995
----------- -----------
ASSETS
- ------
<S> <C> <C>
Cash $ 62,247 $ 5,528
Interest bearing deposits with Portsmouth Savings Bank 18,927,847 19,021,288
----------- -----------
Cash and cash equivalents 18,990,094 19,026,816
Investment in subsidiary 47,130,593 48,727,933
Other assets 7,517 42,447
----------- -----------
$66,128,204 $67,797,196
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accrued expenses $ 51,660 $ 21,564
----------- -----------
Total liabilities 51,660 21,564
----------- -----------
Stockholders' equity 66,076,544 67,775,632
----------- -----------
$66,128,204 $67,797,196
=========== ===========
<CAPTION>
Statements of income
Years ended December 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Dividends from subsidiary $4,868,833 $4,394,351 $4,021,787
Interest income 650,330 641,031 568,004
---------- ---------- ----------
Total income 5,519,163 5,035,382 4,589,791
General and administrative expenses 195,466 170,066 177,377
---------- ---------- ----------
Income before income taxes and equity in
undistributed net income of subsidiary 5,323,697 4,865,316 4,412,414
Income taxes 76,500 114,400 58,400
---------- ---------- ----------
Income before equity in undistributed net
income of subsidiary 5,247,197 4,750,916 4,354,014
Equity in undistributed net income of subsidiary 710,148 1,290,296 1,517,736
---------- ---------- ----------
Net income $5,957,345 $6,041,212 $5,871,750
========== ========== ==========
</TABLE>
34
<PAGE> 37
PORTSMOUTH BANK SHARES, INC. AND SUBSIDIARY
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
PARENT ONLY STATEMENTS OF CASH FLOWS
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,957,345 $ 6,041,212 $ 5,871,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary (710,148) (1,290,296) (1,517,736)
Increase (decrease) in accrued expenses 16,276 (4,851) 3,402
Increase (decrease) in taxes payable 13,820 (8,034) 35,663
(Increase) decrease in prepaid expenses 3,520 (4,167) 333
(Increase) decrease in interest receivable 30,550 (25,462) 94,424
Deferred tax provision 860 1,873
Amortization of investment securities 1,290 1,520
----------- ----------- -----------
Net cash provided by operating activities 5,313,513 4,711,795 4,487,836
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity securities 16,600,000 6,465,000 8,600,000
Purchases of held-to-maturity securities (16,601,290) (6,001,520) (2,465,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities (1,290) 463,480 6,135,000
----------- ----------- -----------
Cash flows from financing activities:
Fractional shares paid in cash (7,259) (5,159) (1,813)
Purchase of treasury stock (583,125) (848,100) (1,025,125)
Dividends paid (4,868,833) (4,394,351) (4,021,787)
Proceeds from sale of common stock 110,272 65,604 139,884
Net cash used in financing activities (5,348,945) (5,182,006) (4,908,841)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (36,722) (6,731) 5,713,995
Cash and cash equivalents at beginning of year 19,026,816 19,033,547 13,319,552
----------- ----------- -----------
Cash and cash equivalents at end of year $18,990,094 $19,026,816 $19,033,547
=========== =========== ===========
Supplemental disclosure:
Income taxes paid $ 61,820 $ 120,561 $ 22,737
</TABLE>
The Parent Only Statements of Changes in Stockholders' Equity are identical to
the Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994, and therefore are not reprinted here.
NOTE 20 - AGREEMENT TO BE ACQUIRED
- ----------------------------------
On February 13, 1997 Portsmouth Bank Shares, Inc. and CFX Corporation (CFX)
signed a definitive agreement under which CFX will acquire Portsmouth Bank
Shares, Inc. and Portsmouth Savings Bank. Pursuant to the agreement, shares of
Portsmouth Bank Shares will be exchanged for shares of CFX common stock. The
agreement is subject to the approval of the shareholders of CFX, the
shareholders of Portsmouth Bank Shares, Inc.
and regulators.
35
<PAGE> 38
OFFICERS AND DIRECTORS - PORTSMOUTH BANK SHARES, INC.
Robert W. Simpson
Chairman of the Board of Directors of Portsmouth Bank Shares, Inc.
Timothy J. Connors
Director and Executive Director of the Portsmouth Housing Authority;
Chairman of N.H. Pari-Mutuel Commission.
Harry R. Hart
Director, President and Chief Executive Officer of Portsmouth Bank Shares,
Inc. Director, Chairman and Chief Executive Officer of Portsmouth Savings
Bank.
Harry P. Jarvis
Director and Co-owner of Metro Restaurant.
Duane L. Jellison
Director, President of D.L.J. Corporation - real estate brokers and
developers
M. Kevin MacLeod
Director and Chief Executive Officer of MacLeod Enterprises, which
operates Yoken's Restaurant, Conference Center and Comfort Inn.
Mark E. Simpson
Director, Secretary and Treasurer of Portsmouth Bank Shares, Inc.;
Director and President of Portsmouth Savings Bank.
<TABLE>
OFFICERS AND DIRECTORS - PORTSMOUTH SAVINGS BANK
<CAPTION>
OFFICERS BOARD OF DIRECTORS
<S> <C> <C>
Harry R. Hart........ Chairman & Chief Executive Officer Timothy J. Connors
Mark E. Simpson...... President & COO Harry R. Hart
John J. Pratt, Jr.... Senior Vice President-Commercial Loans Harry P. Jarvis
Rodney D. Pridham.... Senior Vice President-Mortgages Duane L. Jellison
Donald H. Sargent.... Senior Vice President-Finance M. Kevin MacLeod
William H. Little.... Vice President & Treasurer Mark E. Simpson
Mark E. Whitney...... Ass't Vice President Robert W. Simpson
Eleanor Grattan....... Ass't Treasurer
</TABLE>
36
<PAGE> 39
INFORMATION REQUESTS
The Company's Annual Report on Form 10K is filed with the Securities and
Exchange Commission. Copies are available without charge by writing to:
Mark E. Simpson, Secretary
Portsmouth Bank Shares, Inc.
P.O. Box 6700
Portsmouth, NH 03802-6700
INDEPENDENT PUBLIC ACCOUNTANTS
Shatswell, MacLeod & Company, P.C.
83 Pine Street
West Peabody, Massachusetts 01960-3635
GENERAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
TRANSFER AGENT
Bank of Boston
Shareholder Service Division
150 Royall Street
Canton, Massachusetts 02021
OFFICE LOCATIONS
333 State Street, Portsmouth, New Hampshire, Main Office
Corner of Route 33 and Ocean Road, Greenland, New Hampshire
Corner of Route 1 and Fern Road, North Hampton, New Hampshire
37
<PAGE> 40
PORTSMOUTH BANK SHARES, INC.
P.O. BOX 6700, PORTSMOUTH, NEW HAMPSHIRE 03802-6700
