mutual institutions, the company muddled along for many years, reaching $62 million in assets in 1982. Of 102 banks in New Hampshire at that time, it ranked 75th in size. Survival was a real question. Today, Granite Bank is the third-largest independent commercial bank in New Hampshire. Its road to renewal is an interesting one and offers many lessons. Keene Savings Bank lost $500,000 in 1982, the year the board decided to merge the institution out of business. Charlie Smith was brought in to clean up the operation before it was put on the block. But instead of selling, he decided to turn the bank into a commercial franchise by first changing it into a commercial bank operationally, then building up a commercial banking business. "We needed to build the infrastructure and then go after the commercial bank assets," Mr. Smith said. First he implemented cost controls and securitized and sold off all the fixed-rate assets. The company became 100% variable rate on the asset side and made a profit of $300,000 in 1983, $500,000 the next year, and $1 million the following year. By 1986, capital reached more than 7% of assets, and the board and Mr. Smith decided to convert into a public company with the objective of raising capital and expanding the franchise statewide. Mr. Smith learned a lot of important lessons during that conversion, particularly in the way the bank sold stock. "A typical bank spends 8% to 12% of the amount they raise in fees," he said. "But we spent only $425,000. We paid the investment bankers only $100,000. We produced all our prospectuses and did not typeset them, only the outside cover because every time you change a typeset document, it costs $75. So we did a Xerox job inside instead. Our prospectus cost only $23,000." At the conclusion of that process, the newly named Granite Bank found itself with 20% of capital, while banks holding 50% of the state's banking assets failed. New Hampshire experienced the highest per capita bankruptcy rate in the country. It was in a state of economic catastrophe. Mr. Smith and the board recognized that the only way to leverage the capital was through quality growth, not by creating new branches, and by acquiring assets at a fair price. The company went on an acquisition spree on Mr. Smith's recommendation. It took some fortitude for the board to approve such a plan while 15 banks failed in the state, including the five biggest. Mr. Smith started buying. Within 90 days, he bought two institutions and raised the assets of the company from $200 million to $300 million. "We had to stop, since the company grew 50%," Mr. Smith said. Granite has been digesting its acquisitions and now achieves a respectable 1% return on assets and 12% return on equity with 123 people. The company converted to a commercial bank charter because there were other savings banks in the market that were successful and larger. Granite wanted to compete on a different playing field. By building a full commercial bank structure, it enjoys a 4.55% net interest margin. "It took us eight years to get here," Mr. Smith said. "But we have achieved our objectives." Granite bank is structured as a super community bank today. While all banks were merged into one charter to get the economies of scale, the delivery of services is still highly decentralized, while all banks are in one computer system and one back office. The company's profitability is held down by nonperforming loans of 1.8%, since the New Hampshire economy has not fully recovered. But the capital ratio is still at 11% The story of Granite Bank's turnaround would not be complete without mentioning two young executives who were 25 and 27 when Mr. Smith took over. The bank had one foot in the grave, and Mr. Smith asked the two executives, "Are you up for a turnaround? If you stick with me, I'll know within six months if you can do the job or not." They, and Granite Bank, are all here today running a $300 million bank with a mortgage bank that services $300 million and buys servicing too. What next? I asked. "We're still looking for acquisitions," Mr. Smith said. "We bought four banks, two government assisted and two arm's-length. We fully expect to continue in that vein. We also plan to stay the course in the business mix. We do need to drop the efficiency ratio, since we will become an acquisition target if we're not efficient." Granite is another example of a small, yet effective, super community bank that had a strategic vision and effectively implemented it. Though the company's performance is not stellar, and it has a way to go, Granite's management has accomplished an unusual feat. It has transformed the bank's balance sheet within a relatively short period - from a fixed-rate mortgage company into a variable-rate consumer and commercial bank - supplemented by a mortgage banking operation on the side. This strategic transition is something that many community banks are reluctant to undertake. They feel the process will take forever - with the bank losing its competitive advantage in the meantime. Granite Bank and others demonstrate how a transformation can be accomplished with a well- thought-out plan.

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