10-Q 1 gran-q1.txt BODY OF 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarterly period ended March 31, 2001 Commission File No. 0-14895 Granite State Bankshares, Inc. (Exact name of registrant as specified in its charter) New Hampshire 02-0399222 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 122 West Street, Keene, New Hampshire 03431 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (603) 352-1600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) The number of shares outstanding of each of the issuer's classes of common stock, as of May 8, 2001 was 5,344,519, $1.00 par value per share. INDEX Granite State Bankshares, Inc. and Subsidiary Part I Financial Information Page Item 1. Financial Statements: Consolidated Statements of Financial Condition March 31, 2001 and December 31, 2000 3 Consolidated Statements of Earnings Three Months Ended March 31, 2001 and 2000 4 Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2001 and 2000 5 Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Part II Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 2 Granite State Bankshares, Inc. and Subsidiary Part I - Financial Information Item 1 - Financial Statements Consolidated Statements of Financial Condition

See accompanying notes to unaudited consolidated financial statements. 3 Granite State Bankshares, Inc. and Subsidiary Part I - Financial Information Item 1 - Financial Statements Consolidated Statements of Earnings

See accompanying notes to unaudited consolidated financial statements. 4 Granite State Bankshares, Inc. and Subsidiary Part I - Financial Information Item 1 - Financial Statements Consolidated Statements of Comprehensive Income

See accompanying notes to unaudited consolidated financial statements. 5 Granite State Bankshares, Inc. and Subsidiary Part I - Financial Information Item 1 - Financial Statements Consolidated Statements of Cash Flows

See accompanying notes to unaudited consolidated financial statements. 6 Granite State Bankshares, Inc. and Subsidiary Part I - Financial Information Item 1. Financial Statements Notes to Unaudited Consolidated Financial Statements March 31, 2001 Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the current fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000. Note 2. Earnings Per Share Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Information regarding the computation of earnings per share is as follows:

Weighted average options to purchase 99,750 shares of common stock were outstanding at March 31, 2000, but were not included in the computation of weighted average common shares outstanding for purposes of computing diluted earnings per share, because the effect would have been antidilutive. All options to purchase shares of common stock outstanding at March 31, 2001 were included in the computation of weighted average common shares outstanding for purposes of computing diluted earnings per share. 7 Note 3. Securities Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as part of accumulated other comprehensive income (loss), net of related income tax effects. At March 31, 2001 and December 31, 2000, the Company had no securities classified as trading securities. The amortized cost, estimated market value and carrying value of securities at March 31, 2001 and December 31, 2000 were as follows:

Note 4. Loans Loans consist of the following at:

Real estate mortgage loans and other loans are stated at the amount of unpaid principal, less unearned income and the allowance for possible loan losses. Interest on loans is accrued and credited to operations based upon the principal amount outstanding. When management determines that significant doubt exists as to collectibility of principal or interest on a loan, the loan is placed on nonaccrual status. In addition, loans past due 90 days or more as to principal or interest are placed on nonaccrual status, except those loans which, in management's judgment, are fully secured and in the process of collection. Interest accrued but not received on loans placed on 9 nonaccrual status is reversed and charged against current operations. Interest subsequently received on nonaccrual loans is either applied against principal or recorded as income according to management's judgment as to the collectibility of principal. Loans considered to be uncollectible are charged against the allowance for possible loan losses. The allowance is increased by charges to current operations in amounts sufficient to maintain the adequacy of the allowance. The adequacy of the allowance is determined by management's evaluation of the extent of losses inherent in the loan portfolio and prevailing economic conditions. Changes in the allowance for possible loan losses are as follows:

Information with respect to impaired loans consisted of the following at:

The Company's policy for interest income recognition on impaired loans is to recognize income on impaired loans on the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company; if these factors do not exist, the Company will not recognize income. The average recorded investment in impaired loans was $1,997,000 and $486,000 for the three months ended March 31, 2001 and 2000, respectively. During the three months ended March 31, 2001 and 2000, the Company recognized no income on impaired loans. 10 Note 5. Interest Bearing Deposits Interest bearing deposits consist of the following at:

Note 6. Supplemental Disclosures of Cash Flow Information

Note 7. Adoption of New Accounting Policy The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, on January 1, 2001 as required by the Financial Accounting Standards Board. The cumulative effect on prior years of adopting SFAS No. 133 on January 1, 2001, was not significant and therefore has not been separately disclosed. The impact of accounting for derivative instruments under SFAS No. 133 during the three months ended March 31, 2001 decreased net interest and dividend income by $163,000. The after tax impact on net earnings was a decrease of $98,000. 11 Granite State Bankshares, Inc. and Subsidiary Part I - Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 2001 General All information within this section should be read in conjunction with the consolidated financial statements and notes included elsewhere in this Form 10-Q. All references in the discussion to financial condition and results of operations are to the consolidated financial position of the Company and its subsidiary taken as a whole. The principal business of the Company is to serve as a financial intermediary attracting deposits from the general public and making both secured and unsecured loans. The operating results of the Company depend primarily on net interest and dividend income earned by the Company's subsidiary, Granite Bank ("the subsidiary bank"). Net interest and dividend income is the difference between interest and dividend income on interest earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, which consist of deposits and borrowings. Operating results of the Company also depend upon the provision for possible loan losses, noninterest income, noninterest expense and income taxes. Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Financial Condition Total assets increased by $7,263,000 or 0.76%, from $955,009,000 at December 31, 2000 to $962,272,000 at March 31, 2001. The increase in assets resulted primarily from increases in interest bearing deposits in other banks, securities available for sale and net loans, partially offset by decreases in cash and due from banks and securities held to maturity. Cash and due from banks decreased $10,997,000, from $26,434,000 at December 31, 2000 to $15,437,000 at March 31, 2001. The decrease related primarily to a decrease in the amount of items processed through the Company's depository bank accounts that settled subsequent to the end of the reporting period. 12 Interest bearing deposits with other banks, which primarily consist of deposits with the Federal Home Loan Bank of Boston, increased $10,539,000, from $8,872,000 at December 31, 2000 to $19,411,000 at March 31, 2001. Interest bearing deposits with other banks are short-term overnight investments and the level of the Company's investment in these instruments fluctuates as investments are made in other interest earning assets such as loans, securities held to maturity and securities available for sale, and as balances of interest bearing liabilities such as deposits, securities sold under agreements to repurchase and other borrowings fluctuate. These instruments are also used to fund cash and due from bank requirements. Securities available for sale increased $17,277,000, from $196,522,000 at December 31, 2000 to $213,799,000 at March 31, 2001, while securities held to maturity decreased $12,002,000, from $18,011,000 at December 31, 2000 to $6,009,000 at March 31, 2001. The increase in securities available for sale were funded by the reinvestment of proceeds received from calls of securities held to maturity and an increase in other borrowings. Net loans were $652,412,000 at March 31, 2001, an increase of $4,058,000 from $648,354,000 at December 31, 2000. The most significant changes in the loan portfolio related to commercial real estate loans and commercial, financial and agricultural loans. Commercial real estate loans and commercial, financial and agricultural loans increased $2,799,000 and $1,839,000, respectively. Residential real estate loans decreased by $926,000, as the lower interest rate environment in 2001 encouraged borrowers into fixed rate loans which are sold in the secondary mortgage market. Total deposits decreased $1,838,000, or 0.27%, from $683,334,000 at December 31, 2000 to $681,496,000 at March 31, 2001. The significant changes in deposits related to a decrease in demand deposits, and money market deposit accounts of $9,073,000 and $1,008,000, respectively, partially offset by an increase in time certificates of $8,210,000. The decrease in the balances of demand deposits related primarily to the timing of the cash needs of depositors. The decrease in money market deposit accounts is primarily the result of certain of these depositors looking to achieve higher yields either in other deposit products or in alternate investments outside of traditional bank products. Competitive rates offered by the subsidiary bank for time certificates were attractive to our customers resulting in the increase in balances of time certificates. Securities sold under agreements to repurchase decreased $11,815,000, from $90,811,000 at December 31, 2000 to $78,996,000 at March 31, 2001. Such accounts usually reach a peak in June and December as municipalities invest the real estate taxes they collect and decrease after those periods as the municipalities use their invested cash. Other borrowings, which consist of borrowings from the Federal Home Loan Bank of Boston ("FHLB"), increased $19,987,000 to $120,502,000 at March 31, 2001 from $100,515,000 at December 31, 2000. Changes in other borrowings for the three months ended March 31, 2001 include FHLB callable advances of $20,000,000 with a weighted average rate of 4.35%, $10,000,000 of which are callable March 26, 2002, $5,000,000 of which are callable February 5, 2003 and $5,000,000 of which are callable February 5, 2004. Additionally, repayments of amortizing FHLB debt were $13,000 during the three months ended March 31, 2001. Stockholders' equity increased by $3,195,000 from $73,464,000 at December 31, 2000 to $76,659,000 at March 31, 2001. The increase related primarily to net earnings of $2,657,000 and an increase for the change in accumulated other comprehensive income (loss) of $1,629,000, partially offset by decreases of $911,000 for dividends declared and $264,000 for the purchase of treasury stock. 13 Results of Operations Net Earnings Net earnings for the three months ended March 31, 2001 were $2,657,000, compared to $2,509,000 for the three months ended March 31, 2000. Basic earnings per share were $.50 for the three months ended March 31, 2001, compared to $.44 for the three months ended March 31, 2000. Diluted earnings per share were $.49 for the three months ended March 31, 2001 compared to $.44 for the three months ended March 31, 2000. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, on January 1, 2001 as required by the Financial Accounting Standards Board. The cumulative effect on prior years of adopting SFAS No. 133 on January 1, 2001, was not significant and therefore has not been separately disclosed. The impact of accounting for derivative instruments under SFAS No. 133 during the three months ended March 31, 2001 decreased net interest and dividend income by $163,000. The after tax impact on net earnings was a decrease of $98,000. Interest and Dividend Income Interest and dividend income for the three months ended March 31, 2001 increased by $1,790,000 to $17,104,000 compared to $15,314,000 for the corresponding period in 2000. The increase in interest and dividend income for the three months ended March 31, 2001 compared to the three months ended March 31, 2000 is primarily attributable to an increase in the average balance of interest earning assets of $66,339,000 to $885,533,000 for the three months ended March 31, 2001 compared to $819,194,000 for the three months ended March 31, 2000, as well as an increase in the overall yield on interest earning assets to 7.83% for the three months ended March 31, 2001 from 7.52% for the three months ended March 31, 2000. The increase in the average balance of interest earning assets is attributable to the Olde Port Bank branch acquisition from which approximately $43,200,000 of loans were acquired at year end 2000, as well as normal operational growth in average interest earning assets. The increase in overall yield on interest earning assets is attributable to the acquisition of approximately $43,200,000 of loans relating to the Olde Port Bank branch acquisition at year end 2000, as well as a change in the mix of assets to higher yielding loans, from lower yielding securities and other interest earning investments for the three months ended March 31, 2001 compared to March 31, 2000. The yield on loans increased from 8.10% for the three months ended March 31, 2000 to 8.31% for the three months ended March 31, 2001, and the yield on securities and interest earning investments increased from 6.21% for the three months ended March 31, 2000 to 6.45% for the three months ended March 31, 2001. The higher asset yields in 2001 compared to 2000 are partially the result of the higher interest rate environment that was prevalent during the second, third and fourth quarters of calendar year 2000, compared to the same quarters in 1999, before the Federal Reserve Board began easing interest rates in the first quarter of 2001. The increase in loan yields also resulted from the acquisition of the loans from Olde Port Bank at year end 2000, which were primarily higher yielding commercial real estate and commercial and industrial loans, partially offset by the impact of accounting for derivative instruments under SFAS No. 133. The increase in investment yields also resulted from a change in the mix of the securities portfolio, with increases in higher yielding corporate obligations and decreases in lower yielding U.S. Treasury and U.S. Government Agency obligations. As a result of the Federal Reserve Board decreasing short term interest rates during the first quarter of 2001, management expects asset yields to decrease during the remaining quarters in 2001. Interest Expense Interest expense for the three months ended March 31, 2001 increased by $1,115,000 to $8,498,000 compared to $7,383,000 for the corresponding period in 2000. The increase in interest expense for the three months ended March 31, 2001 compared to the same period in 2000 is primarily due to an 14 increase in the average balance of total interest bearing liabilities of $65,535,000, to $786,913,000 for the three months ended March 31, 2001 compared to $721,378,000 for the three months ended March 31, 2000 as well as an increase in the cost of interest bearing liabilities to 4.38% for the three months ended March 31, 2001 compared to 4.12% for the three months ended March 31, 2000. The increase in the average balance of interest bearing liabilities is attributable to the Olde Port Bank branch acquisition effective at year end 2000, where approximately $31,500,000 of interest bearing deposits and securities sold under agreements to repurchase were assumed, as well as normal operational growth in average interest bearing liabilities. Average balances of savings deposits and time deposits increased $17,428,000 and $18,784,000, respectively, for the three months ended March 31, 2001 compared to the same period in 2000. The average cost of savings deposits decreased to 2.42% for the three months ended March 31, 2001 compared to 2.50% for the three months ended March 31, 2000, while the average cost of time deposits increased to 6.02% for the three months ended March 31, 2001 compared to 5.27% for the same period in 2000. The increase in the cost of time deposits was primarily the result of the higher interest rate environment that was prevalent during the second, third and fourth quarters of calendar year 2000 compared to the same periods in 1999, with maturing time deposits generally renewing at higher rates in 2000 compared to 1999. The average balance of securities sold under agreements to repurchase and other borrowed funds increased $29,323,000 for the three months ended March 31, 2001 compared to the same period in 2000. Average balances of securities sold under agreements to repurchase increased $12,945,000 and average balances of FHLB borrowings increased $16,378,000 during the three months ended March 31, 2001 compared to the same period in 2000. The average cost of securities sold under agreements to repurchase and other borrowed funds decreased slightly to 5.26% for the three months ended March 31, 2001 compared to 5.27% for the three months ended March 31, 2000. As a result of the Federal Reserve Board decreasing short term interest rates during the first quarter of 2001, management expects the costs of interest bearing liabilities to decrease during the remaining quarters of 2001, particularly with respect to time deposits, securities sold under agreements to repurchase and other borrowed funds. Net Interest and Dividend Income Net interest and dividend income increased by $675,000 for the three months ended March 31, 2001 compared to the same period in 2000. The increase for the three months ended March 31, 2001 compared to the same period in 2000 is primarily due to the changes in interest and dividend income and interest expense as discussed above. The interest rate spread increased from 3.40% for the three months ended March 31, 2000 to 3.45% for the three months ended March 31, 2001. The net yield on interest earning assets increased from 3.89% for the three months ended March 31, 2000 to 3.94% for the three months ended March 31, 2001. Provision for Possible Loan Losses The provision for possible loan losses for the three months ended March 31, 2001 was $60,000, compared to $30,000 for the three months ended March 31, 2000. The increase for the three months ended March 31, 2001, compared to the same period in 2000, is primarily related to total loans increasing during the three months ended March 31, 2001 by $4,144,000 compared to an increase of $2,605,000 during the three months ended March 31, 2000. The allowance for possible loan losses is maintained through provisions for possible loan losses based upon management's ongoing evaluation of the losses inherent in the loan portfolio. The methodology for determining the amount of the allowance for possible loan losses consists of several elements. Nonperforming, impaired and delinquent loans are reviewed individually and the value of any underlying collateral is considered in determining estimates of possible losses associated with those loans. Another element involves estimating losses inherent in categories of loans, based primarily on historical experience, industry trends and trends in the real estate market and the current economic environment in the Company's primary market areas. The last element is based on management's evaluation of various 15 conditions, and involves a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with this element include the following: industry and regional conditions and/or concentrations; seasoning of the loan portfolio and changes in the composition of and growth in the loan portfolio; the strength and duration of the current business cycle; existing general economic and business conditions in the lending areas; credit quality trends, including trends in nonperforming loans expected to result from existing conditions; historical loan charge-off experience; and the results of bank regulatory examinations. Noninterest Income Noninterest income for the three months ended March 31, 2001 totaled $1,622,000, compared to $1,272,000 for the same period in 2000. The increase of $350,000 for the three months ended March 31, 2001 compared to the same period in 2000, relates primarily to increases in net gains on sales of securities available for sale and net gains on sales of loans of $222,000 and $96,000, respectively. The increase in net gains on sales of loans in the secondary mortgage market was as a result of an increase in residential real estate loans originated for and sold into the secondary mortgage market in 2001 compared to 2000, due to a declining interest rate environment during the first quarter of 2001, which encouraged refinancing activity and encouraged borrowers in to fixed rate loan products which are sold in the secondary mortgage market. Noninterest Expense Noninterest expense for the three months ended March 31, 2001 increased $698,000, to $5,978,000 as compared to $5,280,000 for the same period a year earlier. The increase for the three months ended March 31, 2001, compared to the same period in 2000 relates primarily to increased costs associated with the acquisition of two Olde Port Bank branches which became effective at year end 2000. Salaries and benefits increased by $371,000, to $3,291,000 for the three months ended March 31, 2001 as compared to $2,920,000 for the same period a year earlier. The increase in salaries and benefits was attributable to the acquisition of the two Olde Port Bank branches which resulted in an increase in full time equivalent employees from 266 at year end 2000 to 292 at March 31, 2001. Additionally, normal salary increases and an increase in commissions paid to mortgage loan originators as a result of the increased refinance activity which occurred for the three months ended March 31, 2001 compared to the same period in 2000, contributed to the increase. Other expenses increased by $330,000, to $1,570,000 for the three months ended March 31, 2001 as compared with $1,240,000 for the same period a year earlier. The increase in other expenses is partially attributable to increased costs related to goodwill and core deposit intangible amortization of $119,000 associated with the Olde Port Bank branch acquisition. Additionally, advertising and marketing costs increased by $86,000, professional fees increased by $61,000 and expenses for printing and supplies increased by $40,000. Income Taxes Income tax expense for the three months ended March 31, 2001 was $1,533,000, compared with $1,384,000 for the same period in 2000. Income tax expense as a percentage of earnings before income taxes was 36.59% for the three months ended March 31, 2001 and 35.55% for the three months ended March 31, 2000. Risk Elements Total nonperforming loans decreased slightly from $3,201,000 or 0.49% of total loans, at December 31, 2000, to $3,070,000 or 0.46% of total loans, at March 31, 2001. During the same period, other real estate owned, increased from $416,000 to $467,000. The allowance for possible loan losses as a percent of total nonperforming loans was 259.58% at March 31, 2001, compared with 245.36% at December 31, 2000. 16 As shown in the following table, nonperforming assets as a percentage of total assets were 0.37% and 0.38%, as of March 31, 2001 and December 31, 2000, respectively.

Liquidity The Company's primary sources of liquidity, through its subsidiary bank, are its borrowing capacity with the Federal Home Loan Bank of Boston, interest bearing deposits with other banks and securities available for sale, particularly short-term investments. At March 31, 2001, short-term and long-term borrowings from the Federal Home Loan Bank of Boston were $120,502,000, with an additional available borrowing capacity of approximately $267,066,000; interest bearing deposits with other banks were $19,411,000 and securities available for sale were $213,799,000. Included in securities held to maturity and securities available for sale are debt securities with a carrying value of $214,633,000. The weighted average maturity for debt securities held to maturity and available for sale, excluding mortgage-backed securities with a carrying value of $5,751,000, is approximately 92 months. The weighted average interest rate sensitivity for these securities is approximately 60 months, when adjusting floating rate securities in the amount of $19,347,000 to next repricing date from maturity date. In addition to these liquidity sources, the Company has significant cash flow from the amortization of loans through its subsidiary bank. Capital Resources Under the Federal Reserve Board's guidelines, bank holding companies such as the Company currently are required to maintain a minimum ratio of qualifying total capital to total assets and off-balance sheet instruments, as adjusted to reflect their relative credit risks, of 8.0 percent. At least one-half of total capital must be comprised of common equity, retained earnings, non-cumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill ("Tier I capital"). The Federal Reserve Board also has established an additional capital adequacy guideline referred to as the Tier I leverage capital ratio, which measures the ratio of Tier I capital to total assets less goodwill. Although the most highly-rated bank holding companies will be required to maintain a minimum Tier I leverage capital ratio of 3.0 percent, most bank holding companies will be required to maintain Tier I leverage capital ratios of 4.0 percent to 5.0 percent or more. The actual required ratio will be based on the 17 Federal Reserve Board's assessment of the individual bank holding company's asset quality, earnings performance, interest rate risk, and liquidity. The Company was in compliance with all regulatory capital requirements at March 31, 2001 and December 31, 2000. Substantially similar rules have been issued by the Federal Deposit Insurance Corporation ("FDIC"), with respect to state-chartered banks which are not members of the Federal Reserve System such as the subsidiary bank. At March 31, 2001 and December 31, 2000, the subsidiary bank was in compliance with all regulatory capital requirements. Additionally, at March 31, 2001, the subsidiary bank was considered "well capitalized" for purposes of the FDIC's prompt corrective action regulations. At March 31, 2001 the Company's and the subsidiary bank's regulatory capital ratios as a percentage of assets are as follows:

On May 3, 2000, the Company announced a Stock Repurchase Program ("Program"), whereby its Board of Directors authorized the repurchase of up to 10% (approximately 566,000 shares), of the Company's outstanding common shares from time to time. Shares repurchased under this Program may be held in treasury, retired, or used for general corporate purposes. As of March 31, 2001, the Company had repurchased 334,027 shares of common stock, with approximately 231,973 shares still available to be repurchased under this Program. Consolidated Quarterly Average Balances and Interest Rates The table on the following page presents, for the periods indicated, average balances of assets and liabilities, as well as yields on interest earning assets and the cost of interest bearing liabilities. 18 Granite State Bankshares, Inc. and Subsidiary Consolidated Quarterly Average Balances and Interest Rates ($ in Thousands)

19 Granite State Bankshares, Inc. and Subsidiary Part I Item 3 and Part II - Other Information March 31, 2001 Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material changes in the Company's assessment of its sensitivity to market risk since its presentation in the 2000 annual report filed with the SEC. Part II -Other Information Item 1. Legal Proceedings The Company is a defendant in ordinary and routine pending legal actions incident to its business, none of which is believed by management to be material to the financial condition of the Company. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K 1. Exhibits None. 2. Reports on Form 8-K None. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRANITE STATE BANKSHARES, INC. /s/ Charles W. Smith --------------------------------- Dated: May 9, 2001 By: Charles W. Smith Chairman and Chief Executive Officer /s/ William G. Pike --------------------------------- Dated: May 9, 2001 By: William G. Pike Executive Vice President and Chief Financial Officer 21

GRANITE STATE BANKSHARES INC 10-Q