Item 1 - Business Item 2
ITEM 2 - PROPERTIES
The Bank owns its main office in West Plymouth, New Hampshire and its branch offices in Plymouth, Campton, Ashland and North Woodstock New Hampshire. The Bank conducts its banking business through its principal office in West Plymouth, New Hampshire and through its four branch offices. In general, all premises occupied by the Bank are considered to be in good condition.
While the Bank does not have any plans to close any of its branch offices, the federal banking laws and regulations impose certain notification and filing requirements on depository institutions which must be complied with prior to the closing of any branches.
The following table lists the properties owned by the Company. The Company owns all of the offices, from which the Company and Bank currently operate.
OFFICE LOCATION
Highland Street W. Plymouth, NH (Main Office)
1-3 Highland Street Plymouth, NH
Route 49 Campton, NH
Route 3 Ashland, NH
Route 3 North Woodstock, NH
At December 31, 1996 the total net book value of the Company's premises and equipment was $3,979,403. Net book value amounts represent the net book value of land and improvements of these properties.
The following table sets forth information with regard to automated teller machines owned and operated by the Company.
LOCATION
287 Highland Street Plymouth, NH
1-3 Highland Street Plymouth, NH
Shop-N-Save Old Route 25 Plymouth, NH
Route 49 Campton, NH
North Main Street Ashland, NH
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
There are no known pending material legal proceedings to which the Company or the Bank are a party, or to which any of their properties are subject, other than ordinary litigation arising in the normal course of business.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matter was submitted to a vote of stockholders of the Company.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
DIVIDEND HISTORY AND POLICY
The Company has paid dividends to stockholders on a semi-annual basis since its organization as a bank holding company for the Bank in 1985. Prior to that time, to the best knowledge and belief of management, the Bank has paid dividends in every year since 1882.
The following table summarizes the Company's dividend history for the fiscal years ended December 31, 1996, December 31, 1995 and December 31, 1994, respectively.
Per Share Dividend History Years Ended December 31, ----------------------------------------- 1996 1995 1994 ---- ---- ---- Dividends Per Share* $ .65 $ .50 $ .40
Net Income Per Share* 1.85 1.85 1.53
Dividends/Net Income 35.13% 27.07% 26.13%
* Based on 690,401 weighted average shares outstanding for 1996, 691,188 weighted average shares outstanding for 1995 and 751,020 weighted average shares outstanding for 1994.
Consistent with prudent banking practices and applicable law, the Company intends to continue its practice of declaring dividends on a semiannual basis to stockholders of record as of the date of declaration. However, there can be no assurance that dividends per share will not be reduced or limited in the future.
The Company's ability to pay dividends is limited by the prudent banking principles applicable to all bank holding companies and by the provisions of New Hampshire Corporate law, which limit the payment of dividends by a corporation to an amount not to exceed the unrestricted earned surplus of the corporation or the unrestricted net earnings of the current fiscal year and the next preceding fiscal year taken as a single period, unless such dividends would render a corporation insolvent.
As a practical matter, the Company's ability to pay dividends is generally limited by the Bank's ability to dividend funds to the Company. As a national bank, the declaration and payment of dividends by the Bank must be in accordance with the National Bank Act. More specifically, applicable law provides that the Board of Directors may declare quarterly, semiannual and annual dividends so long as the Bank carries at least ten percent (10%) of its net profits for the preceding half year in its surplus fund, and, in the case of annual dividends, has carried not less than one-tenth of its net profits of the preceding two consecutive half year periods in its surplus fund. National banks are required to obtain the approval of the Office of the Comptroller of the Currency if the total dividends declared by it in any calendar year exceed the total of its net profits for that year combined with any retained net profits of the preceding two years less any required transfers. In addition to such statutory requirements, the payment of an excessive dividend which would deplete a bank's capital base to an inadequate level could be considered to be an unsafe or unsound banking practice and be a basis for supervisory action by the Office of the Comptroller of the Currency. As of December 31, 1996, approximately $2,407,449, of the undistributed net income of the Bank was theoretically available for distribution to the Company as dividends. However, the ability of the Bank to declare and pay such dividends would be subject to safe and sound banking practices.
The current and future dividend practices of the Bank and the Company will continue to bear a correlation to the level of the Company's and the Bank's current and expected earnings stream, the capital needs of the Bank, and the perceptions of the marketplace. Subject to the foregoing, and consistent with the terms of the Agreement and Plan of Merger which the Company and Bank signed on March 14, 1997 with The Berlin City Bank of Berlin, New Hampshire and Northway Financial, Inc. during 1997, the Company intends to maintain its mid-year dividend in the range of $.15 per share and yearly dividend in the range of $.29 per share. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Matters").
NATURE OF TRADING MARKET
As of March 1, 1997, the Company's Common Stock is owned by approximately 412 stockholders of record. The Common Stock of the Company is not actively traded and is not listed on any public exchange or the National Association of Securities Dealer's Automatic Quotation System ("NASDAQ"). On rare occasions, shares are traded between individuals or through one or more local broker-dealers. Because there is no established market for the Company's shares, the following table represents management's best knowledge and belief of the prices paid in the isolated transactions which have occurred during the past two years. However, the prices set forth may not be indicative of current value.
PRICE ---------------------- FOR THE QUARTER ENDED HIGH LOW - --------------------- ---- --- March 31, 1995 $ 9.00 $ 8.50 June 30, 1995 9.25 9.00 September 30, 1995 10.25 9.00 December 31, 1995 11.50 10.25
March 31, 1996 $10.50 $ 9.50 June 30, 1996 11.00 10.00 September 30, 1996 12.00 11.00 December 31, 1996 12.00 11.00
March 14, 1997 13.50 13.00
During the fourth quarter of 1994 and the first quarter of 1995, the Company redeemed an aggregate of 61,500 shares of its outstanding common stock from eleven (11) shareholders. During the fourth quarter of 1994, a total of 29,800 shares were redeemed from six (6) shareholders at a price of $10.00 per share. The aggregate gross consideration for the redemption amounted to $298,000. The Company did not incur any debt in connection with the redemption.
During the first quarter of 1995, a total of 31,700 shares were redeemed from five (5) shareholders at a price of $10.00 per share. The aggregate gross consideration for the redemption amounted to $317,000. The Company did not incur any debt in connection with the redemption.
The net effect of the redemptions resulted in a reduction in the Company's outstanding common stock by 8.2% hereby slightly increasing the net per share book value to remaining shareholders.
Regulation Y of the Bank Holding Company Act requires bank holding companies to provide the Federal Reserve Board with written notice before purchasing or redeeming equity securities if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the Company for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of the company's consolidated net worth. For purposes of Regulation Y, "net consideration" is the gross consideration paid by a Company for all of its equity securities purchased or redeemed during the period, minus the gross consideration received for all of its equity securities sold during the period other than as part of a new issue.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial information for the periods ended December 31, 1996, 1995, 1994, 1993 and 1992 is based on the Company's audited consolidated financial statements.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and related consolidated financial statements include Pemi Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, the Pemigewasset National Bank (the "Bank"). The Bank operates four branches.
In light of the economic climate in the region, Management is pleased with the results for the fiscal year ended December 31, 1996, which resulted in net income of $1,277,251 and the declaration of dividends amounting to $448,761 or $.65 per share. The Bank's capital ratios and reserves are considered to be healthy, the lending staff is seasoned, the Bank's traditional, conservative practices will continue, and the Bank's facilities are modern, with ample space for any foreseeable growth. As a community bank, the Bank's health and profitability is somewhat dependent upon the local economy and other pressures on community banks, such as the increasing costs of regulation and FDIC insurance premiums.
Growth of the Bank during the late 1980s resulted in crowded conditions which necessitated an increase in working space. In 1990 the West Plymouth office became the main office of the Bank.
The Bank's market area is reasonably stable with no business concentrations other than the resort business.
RESULTS OF OPERATIONS
Net income for the fiscal year ended December 31, 1996 was $1,277,251 as compared with $1,275,294 for the year ended 1995 and $1,150,982 for the year ended 1994. Interest and fees on loans, the Company's primary source of income, for the year ended December 31, 1996 amounted to $8,257,107, $8,123,043 in 1995 and $7,189,810 in 1994. This represents an increase of 1.65% from 1995 to 1996. An increase in loan rates is the primary reason for this increase. Total interest expense for the fiscal year ended December 31, 1996 was $4,153,686 as compared with $3,693,227 for 1995 and $3,052,101 for 1994. These increases reflect an increase in short term rates.
For the fiscal year ending December 31, 1996 other income decreased by $6,631 or .97% from December 31, 1995 and decreased $44,234 or 6.1% from December 31, 1994 to December 31, 1995. Other expense in 1996 increased by $188,069 or 4.2% compared to an increase of $101,372 or 2.3% from 1994 to 1995. An increase in equipment expenses primarily contributed to this result.
At December 31, 1996, the Bank's Allowance for Possible Loan Losses ("APLL") amounted to $1,306,304, which was $53,675 less than the $1,359,979 balance at December 31, 1995. During 1996, the Bank made provisions to the APLL of $152,000 for loan losses as compared to $112,500 in 1995. This compares with provisions of $120,000 in 1994. Provisions are based on the evaluation by management and the Board of current and anticipated economic conditions, changes in character and size of the loan portfolio and other indicators. The balance in the APLL is considered adequate by management and the Board to absorb the risk of loss inherent in the Bank's loan portfolio. Increased provisions during 1996 reflect the growth of the loan portfolio.
In this regard, the APLL was $1,306,304 or 1.48% of total loans at December 31, 1996, as compared with $1,359,979 or 1.66% of total loans for the fiscal year ended December 31, 1995.
As of December 31, 1996, non-performing loans (nonaccrual loans and loans past due 90 days or more) totaled $617,925, or .70% of total loans as compared to $541,303 or .66% at December 31, 1995. This represents an increase of $76,622.
The ratio of APLL to nonaccrual loans for December 31, 1996 was 246.1% as compared to 274.3% for December 31, 1995.
The ratio of APLL to nonaccrual loans plus loans which are past due ninety (90) days or more for December 31, 1996 was 211.4% as compared to 251.2% for December 31, 1995.
The ratio of nonperforming assets (non-performing loans and OREO) to total assets for December 31, 1996 was .52% as compared to .51% for December 31, 1995.
Net charge-offs totaled $205,675 or .23% of total loans as of December 31, 1996 as compared to $319,440 or .39% of total loans as of December 31, 1995.
The Company's assets increased to $128,979,132 at year end December 31, 1996 as compared to $117,322,517 at year end December 31, 1995 and $113,169,496 at year end 1994. This represents a 9.94% increase from December 31, 1995. Net loans increased by 8.8% from December 31, 1995 to the period ended December 31, 1996 and deposits increased by 9.61% for the same period.
The average yield on interest earning assets for 1996, 1995 and 1994 was 9.00%, 9.07% and 8.17%, respectively. For 1996, this represents a 7 basis point decrease in yield on assets. The cost of interest bearing liabilities was 4.30% in 1996, 4.10% in 1995 and 3.37% in 1994. For 1996, this represents a 20 basis point increase in cost of funds.
Nonaccrual loans totaled $530,784 as of December 31, 1996, as compared with $495,705 at December 31, 1995. Management devotes significant time and resources to the resolution of nonaccrual loans and does not believe that this $35,079 increase in aggregate nonaccrual loans is indicative of any trend.
LIQUIDITY AND CAPITAL RESOURCES
Banking institutions measure liquidity as the ability to meet unexpected deposit withdrawals of a short-term nature and to meet increased loan demand. It is Management's objective to ensure a continuous ability to meet cash needs as they arise. As of December 31, 1996 the Bank's liquidity ratio stood at 14.1% as compared to 11.6% at December 31, 1995. With available Federal Home Loan Bank of Boston (FHLB) Advances included, these ratios become 32.8% and 35.5% respectively.
The liquidity ratio is determined by the use of the Bank's Basic Surplus Model which represents a static analysis of the relationship between liquid assets and short-term liabilities which are vulnerable to non-replacement under abnormally stringent conditions. This controlled level of liquidity reflects the efforts of the Bank to redeploy its assets into loans to respond to the credit needs of the community and hopefully improve the Bank's return on assets. Management believes the Bank's liquidity to be adequate to meet the needs of the Bank.
Liquidity is measured by the Bank's ability to raise cash when needed at a reasonable cost and with a minimum of loss. The Bank must be capable of meeting all obligations to customers at any time and, therefor, the active management of liquidity is important.
Given the uncertain nature of customers' demands as well as the Bank's desire to take advantage of earnings enhancement opportunities, the Bank must have available adequate sources of on and off balance sheet funds that can be acquired in time of need. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with alternative sources such as Fed Funds and Lines of Credit, Federal Home Loan Bank Advances, and wholesale and retail repurchase agreements.
Accordingly, when making investments and loans, their marketability and collateral value must be considered. When the necessity for pledging arises, the least marketable should generally be used.
Two methods of measuring liquidity are generally utilized. The first is a static analysis of the relationship between liquid assets and short-term liabilities which are vulnerable to non-replacement under abnormally stringent conditions. The second measure of liquidity operationalizes the static analysis. It is a cash-flow forecast expressed in terms of the relationship between identified funding needs and the estimated level of cash in flows over a 90-day horizon.
Monitoring and managing both liquidity measurements is important in developing prudent and effective deposit pricing and investment strategies.
The equity capital of the Company as of December 31, 1996 amounted to $12,213,909. This represents a 7.20% increase over the equity capital at December 31, 1995. The increase is attributable to a 9.32% increase in retained earnings. Equity capital as a percent of total assets amounted to 9.47% as of December 31, 1996, a decrease of approximately .24% from year end 1995.
The Bank and the Company are required to maintain capital levels consistent with the "risk-based capital guidelines" adopted by the Office of the Comptroller of the Currency and the Federal Reserve System. The Office of the Comptroller of the Currency's capital guidelines require a ratio of Total Capital (consisting of capital, surplus and the allowance for loan losses up to 1.25% of risk weighted assets), to be equal to at least 8.0%. Additionally, the Bank must maintain Tier 1 capital (which under the regulations, consists of Common Stockholders equity, noncumulative perpetual preferred stock and related surplus, and minority interests in the equity accounts of consolidated subsidiaries) in amounts not less than 4.00% of adjusted total assets (or 100 to 200 basis points higher in the case of the banks which do not receive the best composite ratings). At December 31, 1996 the actual Risk Based Capital of the Bank was 16.01% for Tier 1 and 17.35% for Total Capital and the Leverage Capital was 9.46%, substantially exceeding current applicable and any known future minimum regulatory requirements.
Effects of Inflation
Inflation affects the growth of total assets by increasing the level of loan demand and creating the need to increase equity capital at higher than normal rates in order to maintain an appropriate ratio of equity to assets. Interest rates in particular are significantly affected by inflation. In addition to its effects on interest rates, inflation directly affects the Company by increasing the Company's cost of funds and operating expenses.
Interest Rate Sensitivity Analysis
The following discussion of Interest Rate Sensitivity Analysis should be read in conjunction with the GAP Table set forth following the discussion which reflects how the timing and repricing of assets and liabilities would impact liquidity and interest rate spread.
The Bank's rate sensitivity analysis format is divided into four (4) sections. The first section details information concerning various maturities of rate sensitive assets. The second section identifies rate sensitive liabilities. The third section identifies interval GAPS and the fourth, cumulative GAP analysis.
Rate sensitive assets can be divided into two component parts: Investments in Securities and Loans. Investments have various maturities, are normally fixed rates, and when they mature, the proceeds are available for reinvestment. As these securities approach maturity, it is important for the investment officer to be aware of the rate on the maturing investment, current rates available on similar investments and liquidity requirements of the bank. As the securities mature, the proceeds will be invested in rates higher or lower than the maturing security, thus affecting the rate of return.
The final section of rate sensitive assets consists of commercial loans, real estate loans and consumer loans. Commercial loans are comprised of both maturing loans that will be paid off, and loans that mature but will in all likelihood be rewritten. Real estate loans are comprised of those loans whose rates will be repriced at maturity and consumer loans are those that will be repriced and paid in full at maturity.
Rate Sensitive Liabilities are primarily time deposits. As the savings instruments reach maturity, the Bank, in order to retain the deposits, will need to offer competitive rates or be faced with disintermediation. Falling rates indicate it may cost the Bank less to retain these funds, thus increasing profits. Conversely, rising rates may adversely affect profits.
The section on interval GAPS indicate the difference between Rate Sensitive Assets and Rate Sensitive Liabilities at different maturity intervals. It is a snapshot of the GAPS at specific time periods. The ratios measure a tolerance range for various time periods.
The final section on Cumulative GAPS measure the overall GAP position at different time periods.
In analyzing the Bank's GAP, several general principles should be considered. First, in a more risky interest rate environment, you would expect a smaller GAP tolerance range associated with a given appetite for interest rate risk. Conversely, the greater the tolerance range, the greater the expected return and risk.
The GAPS at time intervals indicate the timing of the effect of interest rate changes on income. The Cumulative GAP indicates the overall magnitude and direction of rate risk exposure.
The GAP measures interest rates risk exposure, not liquidity of funding risk.
It may be less costly to adjust the GAP in a negative direction than in a positive direction because capital losses may be generated if the maturity of the investment portfolio is shortened to move the GAP in a positive direction. However, the greater the Bank's ability to replace short-term liabilities with long-term liabilities, the easier it is to adjust the GAP in a positive direction.
Prudent adjustment of the GAP to capitalize on expected interest rate trends will usually result in a negative impact on short term earnings. For example, if rates are expected to rise by more than the consensus rate forecast, a somewhat positive GAP is appropriate.
Generally, the smaller the GAP, the smaller the fluctuation in the net interest margin resulting from changes in levels of interest rates.
If Risk Sensitivity Analysis indicated that the Bank was Asset Sensitive (meaning that it had more rate sensitive assets than rate sensitive liabilities), then rising rates will have a positive impact on earnings; however, falling rates will negatively affect earnings.
Should the analysis indicate liability sensitivity, then rising rates will tend to reduce earnings and falling rates will tend to have a positive impact on earnings.
The Bank's primary tool in managing Interest Rate Risk will be asset/liability funding matrix reports. Income simulation will be utilized to quantify the potential impact on earnings of changes in interest rates. A standard gap report will also be utilized to provide supporting detailed information. Management has monitored deposit runoff in both rising and falling rate environments, and based upon this analysis, has developed simulation models of interest rate risk as well as liquidity cash flows that reflect the results of assumptions.
PEMI BANCORP, INC. RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1996 (IN THOUSANDS)
OTHER MATTERS
On March 14, 1997, the Boards of Directors of the Company, the Bank, The Berlin City Bank ("Berlin"), a New Hampshire chartered commercial bank with its principal place of business in Berlin, New Hampshire and Northway Financial, Inc. ("Northway"), a New Hampshire corporation, which is being formed by Berlin to become a multi-bank holding company for Berlin and the Bank, executed a definitive agreement and plan of merger (the "Agreement").
Pursuant to the terms of the Agreement, Northway will become the bank holding company for Berlin in a transaction whereby each issued and outstanding share of Berlin common stock will be exchanged for 16 shares of Northway common stock (the "Northway Common Stock"). Thereafter, Northway will acquire the common stock of the Company in a transaction whereby each share of the Company's common stock issued and outstanding prior to the effective time will be exchanged for 1.0419 shares of Northway Common Stock.
The transaction, which is subject to approval by state and federal regulators and by the respective shareholders of each institution, has been structured to be tax-free to the shareholders of each institution.
Upon consummation, the Board of Directors of Northway will consist of six of the current directors of Berlin and four of the current directors of the Company. William J. Woodward, the current Chairman, President and Chief Executive Officer of Berlin will serve as Chairman of the Board, President and Chief Executive Officer of Northway. Fletcher W. Adams, the current President and Chief Executive Officer of the Company and the Bank, will serve as Vice Chairman of the Board of Directors of Northway.
The parties anticipate consummating the transactions contemplated by the Agreement in the second half of 1997. The financial information reflected in this Annual Report does not take into account the potential effects of such transaction.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page ----------------------------- ---- Accountants' Opinion, January 16, 1997 except for Note 10, as to which the date is March 7, 1997......................
Consolidated Balance Sheets at December 31, 1996 and 1995..........................
Consolidated Statements of Income for Years Ended December 31, 1996, 1995 and 1994...................................
Consolidated Statements of Changes in Stockholders' Equity for Years Ended December 31, 1996, 1995 and 1994...........
Consolidated Statements of Cash Flows for Years Ended December 31, 1996, 1995 and 1994..............................
Notes to Financial Statements..............
The Board of Directors and Stockholders Pemi Bancorp, Inc. Plymouth, New Hampshire
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Pemi Bancorp, 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 Pemi Bancorp, 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.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts January 16, 1997, except for Note 10, as to which the date is March 7, 1997
PEMI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
PEMI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
PEMI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF OPERATIONS
Pemi Bancorp, Inc. (Company) is a New Hampshire corporation that was organized in 1985 to become the holding company of The Pemigewasset National Bank (Bank). The Company's primary activity is to act as the holding company for the Bank. The Bank is a federally chartered bank which was incorporated in 1881 and is headquartered in Plymouth, New Hampshire. The Bank operates its business from five 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 its 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 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, Federal Home Loan Bank overnight deposits, demand deposits due from banks and federal funds sold.
SECURITIES:
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.
The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-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
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 net 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.
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.
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 writedowns 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 value 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 (including mortgage-backed 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 values. The fair values for other loans are estimated using discounted cash flow analyses, 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 (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, 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 fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.
NOTE 3 - SECURITIES
Debt 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:
The scheduled maturities of held-to-maturity securities and available-for-sale securities were as follows as of December 31, 1996:
There were no sales of available-for-sale or held-to-maturity securities in 1996, 1995 and 1994.
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 loss of $16,480 ($26,850 less tax effect of $10,370) at the date of transfer has been recognized as a separate component of shareholders' equity. The transfer was a result of a reassessment of the appropriateness of the classification of all securities held at 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.
During 1994, the amortized cost of a security held-to-maturity that was transferred to available-for-sale at fair value amounted to $468,862, and the related unrealized loss amounted to $69,165. Such security was transferred as a result of the Company's understanding that there was a significant deterioration in the issuer's creditworthiness.
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 $1,545,062 and $1,144,343 of debt securities was pledged to secure treasury tax and loan, deposits and office of U. S. Trustees (Bankruptcy courts) as of December 31, 1996 and 1995, respectively.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
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 $370,608 as of December 31, 1996. During the year ended December 31, 1996, advances totaled $78,932 and repayments totaled $149,892.
Changes in the allowance for possible loan losses were as follows for the years ended December 31:
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:
As of December 31, 1996, loans restructured in a troubled debt restructuring before January 1, 1995, the effective date of SFAS No. 114, that are not impaired based on the terms specified by the restructuring agreement totaled $260,943. The gross interest income that would have been recorded in the year ended December 31, 1996 if such restructured loans had been current in accordance with their original terms was $27,078. The amount of interest income on such restructured loans that was included in net income for the year ended December 31, 1996 was $22,901.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts (including CDs), each with a minimum denomination of $100,000, was approximately $5,392,466 and $4,889,539 as of December 31, 1996 and 1995, respectively.
For time deposits as of December 31, 1996, the aggregate amount of maturities for each of the following five years ended December 31, and thereafter are:
1997 $31,162,674 1998 12,866,828 1999 1,398,527 2000 424,339 2001 175,971 ----------- $46,028,339 ===========
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB). The components of these borrowings are as follows as of December 31, 1996:
Weighted Average Rate to Maturity Date Balance Maturity ------------- ------- -------- 1997 $4,908,225 5.92% 1998 3,711,700 6.12 1999 82,600 7.43 ---------- Total $8,702,525 ==========
Advances are secured by the Company's stock in that institution, its residential real estate mortgage portfolio and the remaining U.S. government and agencies obligations not otherwise pledged.
NOTE 8 - ACQUISITION OF BRANCH
On April 22, 1996, the Company purchased certain assets and assumed deposits from First New Hampshire Bank's branch office in Campton, New Hampshire. On that day, the Company recorded the following entries to record this transaction.
Loans $ 4,381 Premises and equipment 225,000 Core deposit intangible 175,000 Cash 6,355,157 Other liabilities 1,284 Deposits 6,758,254
The transaction was accounted for using the purchase method of accounting. The results of operations of the acquired branch office are included in the 1996 income statement of the Company from the date of the transaction to December 31, 1996.
The core deposit intangible is being amortized over 10 years. During 1996 amortization expense amounted to $13,125.
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows for the years ended December 31:
1996 1995 1994 ---------- ---------- ------- Current: Federal $438,000 $431,000 $349,233 State 90,000 88,000 50,198 -------- -------- -------- 528,000 519,000 399,431 -------- -------- -------- Deferred: Federal 82,971 90,269 124,262 State 17,049 18,431 28,723 -------- -------- ------- 100,020 108,700 152,985 -------- -------- ------- Total income tax expense $628,020 $627,700 $552,416 ======== ======== ========
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:
1996 1995 1994 % of % of % of Income Income Income ------ ------ ------ Federal i 34.0% 34.0% 34.0% Increase (decrease) in tax resulting from: Tax-exempt income (6.2) (5.1) (5.7) Unallowable expenses .8 .6 .6 Other, net 1.3 .5 .5 State tax, net of 3.1 3.0 3.0 ---- ---- ---- 33.0% 33.0% 32.4% ==== ==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:
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.
NOTE 10 - CONTINGENCY
The Bank intends to file with the Internal Revenue Service an application to resolve certain problems concerning the eligibility of its defined benefit pension and 401K plans. Bank management and counsel estimate that the sanction that would be imposed by the IRS is between $25,000 and $200,000.
NOTE 11 - EMPLOYEE BENEFITS
The Company has a qualified defined benefit pension plan covering substantially all of its employees who meet certain eligibility requirements. The benefit provision of the plan is 50% of monthly compensation reduced by 1/20 for each year of service less than 20 years.
The following table sets forth the funded status of the plan and amounts recognized in the Company's balance sheet as of December 31:
Net periodic pension cost included the following components for the years ended December 31:
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 were 8.0% and 4.0%. The expected long-term rate of return on assets was 8.0%.
The Bank has a 401(k) plan. To be eligible, employees must have attained age twenty-one, completed six months of service and be credited with 1,000 hours of service. The Bank matches employee contributions on the first 4% of compensation deposited as elective contributions. The 401(k) matching expense was $13,744, $15,714 and $12,680 for the years ended December 31, 1996, 1995 and 1994, respectively.
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, standby letters of credit 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 and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations 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 many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Of the total standby letters of credit outstanding as of December 31, 1996, $33,000 are secured by deposit accounts held by the Bank.
The provisions of Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments," as amended by SFAS No. 119, became effective for the Company as of December 31, 1995.
The disclosures are the estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, which are as follows as of December 31:
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.
Notional amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of December 31:
1996 1995 ---------- ---------- Commitments to originate loans $1,768,044 $1,152,100 Standby letters of credit 211,114 141,656 Unadvanced portions of commercial real estate loans 45,000 47,526 Unadvanced portions of home equity loans 1,019,889 405,661 Unadvanced portions of commercial lines of credit 3,072,335 5,771,961 ---------- ---------- $6,116,382 $7,518,904 ========== ==========
There is no material difference between the notional amounts and the estimated fair values of the 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 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company'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 Company's loan portfolio is comprised of loans collateralized by real estate located in the state of New Hampshire.
NOTE 14 - EARNINGS PER SHARE
Earnings per share for 1996, 1995 and 1994 were calculated using the weighted average number of shares outstanding during those periods. For 1996, 1995 and 1994 earnings per share calculations, the weighted average number of shares outstanding were 690,401, 691,188 and 751,020, respectively.
NOTE 15 - REGULATORY MATTERS
The Bank, as a National Bank is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends, as of December 31, 1996 that the Bank could declare, without the approval of the Comptroller of the Currency, amounted to approximately $2,407,449.
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 Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized 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 Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
NOTE 16 - RECLASSIFICATION
Certain amounts in the prior year have been reclassified to be consistent with the current year's statement presentation.
NOTE 17 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following financial statements are for Pemi Bancorp, Inc. (Parent Company Only) and should be read in conjunction with the consolidated financial statements of Pemi Bancorp, Inc. and Subsidiary.
PEMI BANCORP, INC. (Parent Company Only)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
PEMI BANCORP, INC. (Parent Company Only)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
PEMI BANCORP, INC. (Parent Company Only)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Parent Company 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.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements with its independent accountants on accounting and financial disclosure matters.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company (or where so indicated, the Bank) are as follows:
Position(s) with Name Age the Company - ---- --- ----------- Fletcher W. Adams 60 President, Treasurer and Chief Executive Officer of the Company; President and Chief Executive Officer of the Bank; Director
Frederick C. Anderson 45 Director of the Bank
Charles H. Clifford, Jr. 61 Director
James E. Currie 73 Vice President and Secretary of the Company; Director of the Company
Andrew L. Morse 54 Director
John H. Noyes 50 Director
Milton E. Pettengill 70 Chairman of the Board; Director
Keith L. Philbrick 48 Chief Financial Officer
Ann M. Reever 52 Director
Robert R. Sargeant 45 Vice President and Senior Loan Officer of the Bank
Dean H. Yeaton 59 Director - --------------------- With the exception of Mr. Anderson, a director of the Bank, (who is a director of Whole Village Family Resource Center, Northeast Public Power Association, Northeast Association of Electric Cooperatives) no director or executive officer holds a directorship in any company with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
Fletcher W. Adams has been a director of the Company since it was organized in 1985. From 1985 until 1990, Mr. Adams was the Executive Vice President of the Company. In January, 1990, Mr. Adams became President and Chief Executive Officer of the Company. Mr. Adams is also the President, Chief Executive Officer and a director of the Bank. Mr. Adams joined the Bank as Executive Vice President in June of 1984. Prior to joining the Bank, Mr. Adams was the President of Adams Supermarket, Inc., a company which owned a supermarket. Mr. Adams has been a director of the Bank since 1973.
Frederick C. Anderson has been a director of the Bank since January of 1997. Mr. Anderson has served as the General Manager and Chief Executive Officer of New Hampshire Electric Cooperative, Inc. since August 1992. Prior to that, he served as the Assistant General Manager of New Hampshire Electric Cooperative, Inc.
Charles H. Clifford, Jr. has been a director of the Company since it was organized in 1985. Mr. Clifford has been a director of the Bank since 1980. Mr. Clifford is a partner in the business firm of Clifford-Nicol Printing and is that firm's President.
James E. Currie has been a director of the Company since it was organized in 1985. Prior to retiring in July of 1986, Mr. Currie was Vice President and Senior Loan Officer of the Bank. Mr. Currie also served as a director of the Bank.
Mr. Morse has been a director of the Bank since January of 1996 and a director of the Company since May of 1996. Mr. Morse has been the owner of Waynes Market since 1991 and Woodstock Cheese Shoppe since 1995.
John H. Noyes has been a director of the Company and the Bank since 1994. Mr. Noyes is the Treasurer of Noyes Insurance Agency, Inc. and since 1991 has served as President of Central Square Insurance, Inc.
Milton E. Pettengill has been the President, Chief Executive Officer and a director of the Company since it was organized in 1985. In January of 1990, he became Chairman of the Company. Mr. Pettengill has been with the Bank since 1951. He has been an executive officer of the Bank since 1974, and a director of the Bank since 1973. Retiring in January of 1990, he now serves as Chairman of the Board.
Keith L. Philbrick has been the Chief Financial Officer of the Bank since November 1994. From October 1980 through November 1994, Mr. Philbrick served as the Bank's senior mortgage officer. Mr. Philbrick has been with the Bank since 1970.
Ann M. Reever has been a director of the Company since 1993. Mrs. Reever, a self-employed business manager, has been a member of the Pemi-Baker Regional School Board since 1989 and a Director of the Swift Water Girl Scout Council since 1991.
Robert R. Sargeant has been the Senior Loan Officer of the Bank since 1987. From 1980 to 1987, Mr. Sargeant served as the Commercial and Consumer Loan Officer of the Bank. Mr. Sargeant has been with the Bank since 1974.
Dean H. Yeaton has been a director of the Company since 1986. Mr. Yeaton has been a director of the Bank since 1986. Mr. Yeaton is the President of Dean H. Yeaton, Inc., and the President of Yeaton Oil Company.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended December 31, 1996, 1995 and 1994, respectively, the remuneration received by the President, Treasurer and Chief Executive Officer of the Company and Bank, respectively. No individual employed by the Bank or Company received more than $100,000 in compensation during fiscal years 1996, 1995 and 1994, respectively.
SUMMARY COMPENSATION TABLE Name and Principal Position Year Salary Bonus - ------------------ ---- ------ ----- Fletcher W. Adams 1996 $97,000 (1) $1,965 (2) President, Treasurer and 1995 $93,600 (1) $1,830 (3) Chief Executive Officer of 1994 $87,100 (1) $1,715 (4) the Company and the Bank
- ------------------ (1) Includes salary and monthly fee received for attendance at Board of Directors Meetings of the Bank and Company.
(2) This amount includes a bonus of $1,865 equal to one week of salary. Every full time employee of the Bank with seniority of one year or more received a year end bonus equivalent to one week of salary. This amount also includes a $100 Christmas bonus received by each full-time employee of the Bank with seniority of one year or more.
(3) This amount includes a bonus of $1,730 equal to one week of salary. Every full time employee of the Bank with seniority of one year or more received a year end bonus equivalent to one week of salary. This amount also includes a $100 Christmas bonus received by each full-time employee of the Bank with seniority of one year or more.
(4) This amount includes a bonus of $1,615 equal to one week of salary. Every full time employee of the Bank with seniority of one year or more received a year end bonus equivalent to one week of salary. This amount also includes a $100 Christmas bonus received by each full-time employee of the Bank with seniority of one year or more.
In addition to the cash compensation, officers and other full-time employees of the Company or the Bank receive group life, health, hospitalization and medical reimbursement insurance coverage. However, these plans do not discriminate in scope, terms, or operation, in favor of officers of the Company and the Bank and are available generally to all full-time employees.
Employment Contracts
There are no employment agreements between the Company, the Bank and any employees of the Company or Bank.
Pension Plan
The Bank has a qualified pension plan covering substantially all of its employees meeting certain eligibility requirements. Benefits paid under this plan are based on fifty percent (50%) of monthly compensation reduced by 1/20 for each year of service less than twenty (20) years.
In March 1997, the Bank filed an application with the Internal Revenue Service (the "IRS") to resolve certain ambiguities and potential issues concerning the eligibility of its defined benefit pension and 401k plans. As reflected in footnotes to the Consolidated Financial Statements of the Company for the year-ended December 31, 1996, it is estimated that the sanction that would be imposed by the IRS to resolve these issues is between $25,000 and $200,000.
Compensation of Directors
The Directors of the Company and the Bank receive $300 for each Board of Directors meeting they attend except for the Chairman of the Board of Directors who receives $500 and the Clerk of the Board of Directors who receives $375 for each Board of Directors meeting they attend. In addition, members of various Board of Director's Committees receive a fee of $175 per committee meeting attended.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table includes certain information as of March 1, 1997 regarding the principal stockholders of the Company. With the exception of the stockholders listed below, the Company is not aware of any beneficial owner of five percent (5%) or more of the Company's Common Stock.
Name and Address of Amount of Shares Percent Beneficial Owner Beneficially Owned(1) of Class - ---------------- --------------------- -------- American Global Insurance Co. 43,200 6.26% c/o Fiduciary Trust Co. Int. Two World Trade Center New York, NY 10048
Fletcher W. Adams 57,927(2) 8.39% President, Treasurer and Chief Executive Officer of the Company and the Bank; Director
(1) Percentages are based upon the 690,401 shares of Common Stock outstanding as of March 1, 1997. The definition of a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or investment power with respect to such security.
(2) Includes 44,250 shares owned individually by Mr. Adams, 4,000 shares owned jointly with his wife, 1,700 shares owned by his son, 1,700 shares owned by his daughter and 6,277 shares owned by an estate of which Mr. Adams is Trustee.
DIRECTORS
The following table includes certain share ownership and biographical information as of March 1, 1997 regarding each director of the Company and share ownership of all directors and executive officers as a group:
Director of PEMI BANCORP, Shares of Name, INC. since and Common Stock Title and (Expiration Beneficially (Principal Date of Owned As of Percentage Occupation) Age Current Term) March 1, 1997(1) of Class - ----------- --- ------------- ---------------- -------- Fletcher W. Adams 60 1985; 57,927(2) 8.39% Director; (1998) (President, Treasurer, and Chief Executive Officer of the Company)
Charles H. Clifford, Jr. 61 1985; 2,400(3) .35% Director; (1998) (President of Clifford-Nicol Printing, Inc.)
James E. Currie 73 1985; 3,600(4) .52% Director; (1997) (Vice President and Secretary of the Company)
Andrew L. Morse 54 1996; 1,000(5) .14% Director; (1999) (Owner of Waynes Market and Woodstock Cheese Shoppe) - ------------------ Footnotes follow table
Director of PEMI BANCORP, Shares of Name, INC. since and Common Stock Title and (Expiration Beneficially (Principal Date of Owned As of Percentage Occupation) Age Current Term) March 1, 1997(1) of Class - ----------- --- ------------- ---------------- -------- John H. Noyes 50 1994; 11,350(6) 1.64% Director; (1998) (Treasurer; Noyes Insurance Agency, Inc., President; Central Square Insurance, Inc.)
Milton E. Pettengill 70 1985; 8,800(7) 1.28% Chairman of (1997) the Board of Directors; (Retired President and Chief Executive Officer of the Company and the Bank)
Ann M. 52 1993; 2,450(8) .35% Reever (1999) Director; (Self-employed business manager; Member of Pemi- Baker Regional School Board; Director of Swift Water Girl Scout Council) - ------------------- Footnotes follow table
Director of PEMI BANCORP, Shares of Name, INC. since and Common Stock Title and (Expiration Beneficially (Principal Date of Owned As of Percentage Occupation) Age Current Term) March 1, 1997(1) of Class - ----------- --- ------------- ---------------- -------- Dean H. Yeaton 59 1986; 5,350(9) .78% Director; (1999) (President Yeaton Oil Co,; President Dean H. Yeaton, Inc.)
All Directors (as a group 92,877 13.45% eight(8) individuals) ====== ====== - -------------------- (1) Percentages are based upon the 690,401 shares of Common Stock outstanding as of March 1, 1997. The definition of beneficial owner includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or investment power with respect to such security.
(2) Includes 44,250 shares owned individually by Mr. Adams, 4,000 shares owned jointly with his wife, 1,700 shares owned by his son, 1,700 shares owned by his daughter and 6,277 shares owned by an estate of which Mr. Adams is Trustee.
(3) All shares are owned individually by Mr. Clifford.
(4) Includes 1,400 shares owned individually by Mr. Currie and 2,200 shares owned jointly with his wife.
(5) All shares are owned individually by Mr. Morse.
(6) All shares are owned individually by Mr. Noyes.
(7) Includes 1,000 shares owned individually by Mr. Pettengill and 7,800 shares owned jointly with his wife.
(8) All shares are owned individually by Mrs. Reever.
(9) Includes 2,000 shares owned individually by Mr. Yeaton, 1,000 shares owned by his wife and 2,350 shares owned jointly with his wife.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the Directors and Executive Officers of the Company and companies or organizations with which they are associated, have had, and may have in the future, banking transactions with the Bank in the ordinary course of the Bank's business. As of December 31, 1996, the Bank had outstanding $370,608 in loans to Directors and Executive Officers of the Company and the Bank and immediate family members of such Executive Officers and Directors, which represents 3.03% of capital.
Federal banking laws and regulations limit the aggregate amount of indebtedness of all insiders. Pursuant to such laws and regulations, banks may extend credit to executive officers, directors, principal stockholders or any related interest of such persons, if the extension of credit to such persons is in an amount that, when aggregated with the amount of all outstanding extensions of credit to such individuals, does not exceed the banks unimpaired capital and unimpaired surplus. As of December 31, 1996, the aggregate amount of extensions of credit to Bank insiders was well below this limit.
All loans and commitments to loan to the Company's and Bank's Directors, Executive Officers and their associates are made on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions with other persons and, in the opinion of Management, do not involve more than a normal risk of collection or, present other unfavorable features.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)
1. Financial Statements
The financial statements filed as part of this report are listed in the index appearing at Item 8.
2. Financial Statement Schedules
Schedules are omitted because they are not applicable.
3. Exhibits
Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Merger dated March 14, 1997 by and among Pemi Bancorp, Inc., Pemigewasset National Bank, The Berlin City Bank and Northway Financial, Inc. was filed on March 26, 1997 as Exhibit 2 to Pemi Bancorp, Inc.'s Current Report on Form 8-K and is incorporated by reference.
3.1-3.2 Restated and Amended Articles of Organization of the Registrant filed as Exhibits 3.1, to the Registrant's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1992, and are incorporated herein by reference.
21 List of Subsidiaries of the Company is filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1994 and is incorporated herein by reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the 1996 fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: March 17, 1997 PEMI BANCORP, INC.
By /s/ Fletcher W. Adams ------------------------------- Fletcher W. Adams President, Treasurer and Chief Executive Officer
Date: March 17, 1997 By /s/ Keith L. Philbrick ------------------------------- Keith L. Philbrick Chief Financial Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Company's Annual Report and Proxy Material will be furnished to the Company's Stockholders prior to the Annual Meeting and copies will be furnished to the Commission at that time.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date - ---- ----- ----
/s/ Fletcher W. Adams President, Treasurer March 17, 1997 - ---------------------------- Chief Executive Fletcher W. Adams Officer and Director
/s/ Charles H. Clifford, Jr. Director March 17, 1997 - ---------------------------- Charles H. Clifford, Jr.
Director March __, 1997 - ---------------------------- James E. Currie
/s/ Andrew L. Morse Director March 17, 1997 - ---------------------------- Andrew L. Morse
/s/ John H. Noyes Director March 17, 1997 - ---------------------------- John H. Noyes
Director March __, 1997 - ---------------------------- Milton E. Pettengill
/s/ Ann M. Reever Director March 17, 1997 - ---------------------------- Ann M. Reever
/s/ Dean H. Yeaton Director March 17, 1997 - ---------------------------- Dean H. Yeaton