<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_____________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 000-29343
Port Financial Corp.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1145480
(State or other jurisdiction of (I.R.S. Employer
inCorporation or organization) Identification No.)
1380 Soldiers Field Road, Brighton, Massachusetts 02135
(Address of principal executive offices)
(Zip Code)
(617) 661-4900
(Registrant's telephone number including area code)
N/A
---------------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
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 twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding at
Class August 3, 2000
----------------------------------- -----------------------------------------
Common Stock,
Par value $.01 7,442,818
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements of Port Financial Corp.
Consolidated Balance Sheets (Unaudited) - June 30, 2000 and
December 31, 1999
Consolidated Statements of Income (Unaudited) - Six months ended
June 30, 2000 and June 30, 1999
Consolidated Statements of Changes in Sharesholders' Equity (Unaudited)
Six months ended June 30, 2000 and June 30, 1999
Consolidated Statements of Cash Flows (Unaudited) - Six months ended
June 30, 2000 and June 30, 1999
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 27 - Financial Data Schedule
1
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Port Financial Corp.
Consolidated Balanced sheet
(Unaudited)
June 30, December 31,
2000 1999
-------------- -----------------
ASSETS (In Thousands)
<S> <C> <C>
Cash and due from Banks $ 12,129 $ 16,594
Federal funds sold 7,795 -
Other cash equivalents 5,613 2,835
--------- ---------
Total cash and cash equivalents 25,537 19,429
Certificates of deposit 100 5,149
Investment securities held to maturity 24,674 -
Investment securities available-for-sale at fair value 140,086 131,647
Loans held-for-sale 1,101 -
Loans, net 634,146 577,029
Federal Home Loan Bank Stock, at cost 4,951 4,452
Savings Bank Life Insurance Stock, at cost 1,934 1,934
Banking premises and equipment, net 22,295 11,782
Accrued interest receivable 5,111 4,054
Other assets 7,007 7,265
--------- --------
Total assets $ 866,942 $762,741
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 681,479 $618,288
Federal Home Loan Bank advances 26,202 55,891
Mortgagors' escrow payments 3,092 3,031
Accrued expenses and other liabilities 6,996 6,401
--------- --------
Total liabilities 717,769 683,611
--------- --------
Stockholders' Equity:
Preferred stock ($ .01 par value;
5,000,000 shares authorized; no shares
issued and outstanding) - -
Common stock ( $ .01 par value;
30,000,000 shares authorized;
shares issued and outstanding:
7,442,818 at June 30, 2000) 74 -
Additional paid-in capital 71,776 -
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Port Financial Corp.
Consolidated Balance Sheet-(Continued)
(Unaudited)
June 30, December 31,
2000 1999
-------------------- -------------------
(In Thousands)
<S> <C> <C>
Unearned compensation - ESOP
(413,300 shares held by the ESOP
at June 30, 2000) (4,670) -
Retained earnings 80,144 77,221
Accumulated other comprehensive income 1,849 1,909
---------------- --------------
Total stockholders' equity 149,173 79,130
---------------- --------------
Total liabilities and stockholders' equity $ 866,942 $ 762,741
================ ==============
See the accompanying notes to unaudited consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Port Financial Corp.
Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------------
2000 1999 2000 1999
-------------------- -------------------- ------------ --------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans $ 11,907 $ 9,948 $ 23,047 $ 19,889
Ierest and dividends on investment securities 2,685 2,143 4,950 4,281
Interest on other cash equivalents 445 220 651 403
Interest on certificates of deposit 20 102 107 203
---------- ------------ ----------- -------------
Total interest and dividend income 15,057 12,413 28,755 24,776
---------- ------------ ----------- -------------
Interest expense:
Interest on deposits 6,851 5,784 13,383 11,554
Interest on borrowed funds 488 554 1,156 1,080
---------- ------------ ----------- -------------
Total interest expense 7,339 6,338 14,539 12,634
---------- ------------ ----------- -------------
Net interest income 7,718 6,075 14,216 12,142
Provision for possible loan losses 250 132 416 272
---------- ------------ ----------- -------------
Net interest income after provision for
Possible loan losses 7,468 5,943 13,800 11,870
---------- ------------ ----------- -------------
Noninterest income:
Customer service fees 254 215 480 409
Net gain on sale of investment securities, net - - - -
Gain on sale of loans, net 51 177 74 420
Loan servicing fee income 127 117 257 247
Other income 317 142 324 272
---------- ------------ ----------- -------------
Total noninterest income 749 651 1,135 1,348
---------- ------------ ----------- -------------
Noninterest expense:
Salaries and employee benefits (1) 2,981 2,350 5,703 4,693
Occupancy and equipment expense 960 843 1,712 1,656
Data processing service fees 395 385 775 708
Marketing 287 291 589 515
Other noninterest expense 831 655 1,604 1,408
---------- ------------ ----------- -------------
Total noninterest expenses 5,454 4,524 10,383 8,980
---------- ------------ ----------- -------------
Income before provision for income taxes 2,763 2,070 4,552 4,238
Provision for income taxes 967 742 1,629 1,530
---------- ------------ ----------- -------------
Net income $ 1,796 $ 1,328 $ 2,923 $ 2,708
========== ============ =========== =============
Earnings per share:
Basic (3) $ 0.25 (2) (2) (2)
Diluted $ 0.25 (2) (2) (2)
Weighted average shares outstanding:
Basic 7,145,719 (2) (2) (2)
Diluted 7,145,719 (2) (2) (2)
</TABLE>
See the accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
(1) At June 30, 2000 the ESOP held unallocated shares with an aggregate cost of
$4,669,838 and a market value of $5,666,106. For the three and six month periods
ended June 30, 2000 $59,389 wash charged to compensation and employee benefit
expense based on commitment to release 4,962 shares to employees.
EPS
(2) Earnings per share is not presented for the six months ended June 30, 2000
since the earnings per share calculation for that period is not meaningful for
the period prior to April 11, 2000 (the date of conversion to a stock company).
Earnings per share is not presented for all periods prior to the conversion to
stock form since the Company was a mutual holding company and no stock was
outstanding.
(3) Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the periods
presented. ESOP shares committed to be released are considered outstanding while
unallocated ESOP share not considered outstanding.
<TABLE>
<CAPTION>
Port Financial Corp.
Consolidated Statements of Changes in Shareholders' Equity
For The Periods Ending June 30, 2000 and 1999
(Unaudited)
Additional Other ESOP
Common Paid-In Retained Comprehensive Unearned
Stock Capital Earnings Income Compensation Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ - $ - $ 72,447 $ 3,641 $ - $ 76,088
Net income - - 2,708 - - 2,708
Other Comprehensive income-
Change in unrealized gain on securities
Available for sale, net of taxes - - - (1,260) - (1,260)
--------------------------------------------------------------------------------------
Balance at June 30, 1999 $ - $ - $ 75,155 $ 2,381 $ - $ 77,536
======================================================================================
Balance at December 31, 1999 $ - $ - $ 77,221 $ 1,909 $ - $ 79,130
Net income - - 2,923 - - 2,923
Issuance of stock less offering costs 74 71,776 - - - 71,850
Other Comprehensive income -
Change in unrealized gain on securities
Available for sale, net of taxes - - - (60) - (60)
Comprehensive income
ESOP unearned compensation -
Acquisition of shares (4,727) (4,727)
Release of shares - - - - 57 57
------------ ------- -------- ------- -------- --------
Balance at June 30, 2000 $ 74 $71,776 $ 80,144 $ 1,849 $(4,670) $149,173
======================================================================================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Port Financial Corp.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Six months Six months
Ended June 30, Ended June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,923 $ 2,708
Adjustments to reconcile net income to net cash
Provided by operating activities-
Provision for possible loan losses 416 272
Depreciation and amortization 535 648
Net gain from sales of investment securities - -
Amortization (accretion) of premiums on investment securities, net (76) 113
Gain on loan sales, net (74) (420)
Gain on sales of other real estate owned, net - -
Decrease in cash surrender value of life insurance policies 88 -
Proceeds from sale of loans 7,254 32,119
Loans originated for sale (8,281) (29,781)
(Increase) decrease in other assets 170 1,495
(Increase) decrease in accrued interest receivable (1,057) (727)
(Decrease) increase in deferred loan fees (209) (36)
(Decrease) increase in accrued expenses and other liabilities 595 (1,479)
--------------- -----------------
Net cash provided by (used in) operating activities 2,284 4,912
--------------- -----------------
Cash flows from investing activities
Proceeds from sales, maturities and principal repayments
of securities available-for-sale 10,537 26,620
Purchases of securities available-for-sale (19,161) (17,896)
Proceeds from sales, maturities and principal repayments
of held to maturity securities 298 -
Purchases of held to maturity securities (24,969) -
Proceeds from maturities of certificates of deposit 5,228 1,106
Purchase of certificates of deposit (79) (185)
Net increase in short-term investments - -
Purchase of FHLB stock (499) (573)
Proceeds from sales of other real estate owned - -
Purchase of premises and equipment (11,048) (1,666)
Loan originations, net (57,231) (27,093)
Recoveries of loans previously charged-off 65 108
--------------- -----------------
Net cash used in investing activities (96,859) (19,579)
--------------- -----------------
</TABLE>
6
<PAGE>
Port Financial Corp.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months Six months
Ended June 30, Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from financing activities:
Increase (decrease) in certificates of deposits (14,459) 7,823
Increase in demand deposits, NOW accounts and saving accounts 77,650 12,059
Increase (decrease) in mortgagor's escrow payments 61 (343)
Additions to borrowings - 8,686
Repayment of borrowings (29,689) -
Gross proceeds on stock offering 74,428 -
Stock offering costs (2,581) 8,686
ESOP (4,727) -
--------- --------
Net cash provided by financing activities 100,683 28,225
--------- --------
Net increase in cash and cash equivalents 6,108 13,558
Cash and cash equivalents, beginning of year 19,429 10,047
--------- --------
Cash and cash equivalents, end of period $ 25,537 $ 23,605
========= ========
Supplemental disclosures of cash flows information:
Cash paid for interest $ 14,614 $ 12,607
========= ========
Cash paid for income taxes $ 1,165 $ 2,117
========= ========
</TABLE>
See the accompanying notes to unaudited consolidated financial statements
7
<PAGE>
Port Financial Corp.
Notes to Unaudited Consolidated Financial Statements
1) Basis of Presentation
The unaudited consolidated financial statements of Port Financial Corp. ("Port"
or the "Company") include the accounts of the Company and its two wholly owned
subsidiaries, Cambridgeport Bank (the "Bank") and Brighton Investment
Corporation. Brighton Investment Corporation engages in the investment of
securities. Cambridgeport Bank is a Massachusetts-chartered savings bank with
its headquarters located in Cambridge, Massachusetts. The Bank has two wholly
owned subsidiaries, Temple Investment Corporation and River Investment
Corporation. Temple Investment Corporation and River Investment Corporation
both engage in the investment of securities. In addition, Cambridgeport Bank is
the sole member of Temple Realty LLC, which was formed to own the land and the
building of the Company's new administrative center.
The unaudited consolidated financial statements of Port presented herein, should
be read in conjunction with the consolidated financial statements of
Cambridgeport Mutual Holding Company as of and for the year ended December 31,
1999, and the notes thereto. 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. The preparation of financial
statements in conformity with generally accepted accounting principle requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent asset and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments (consisting only of normal
adjustments) necessary for a fair presentation. Interim results are not
necessarily indicative of results to be expected for the entire year.
2) Conversion
On April 11, 2000, the Company received regulatory approval to complete its
offering of common stock in connection with the conversion of Cambridgeport
Mutual Holding Company to a stock holding Company. The Company's common stock
began trading on the NASDAQ National Market on April 12, 2000. The Company sold
7,442,818 shares of common stock at a price of $10 per share to eligible
depositors of the Company, management and employees, and the Company's employee
stock ownership plan ("ESOP") in the stock offering.
8
<PAGE>
3) New Administrative Center
On March 1, 2000, Temple Realty LLC purchased a parcel of land and a newly-
constructed office building located in the Brighton section of Boston,
approximately two miles from the Company's headquarters in Cambridge. The total
cost of the building is approximately $16.5 million, of which $14.5 million has
been funded by borrowings from the Federal Home Loan Bank of Boston. The
Company's administrative departments and all lending operations moved to the new
building during the second quarter. Company units occupy approximately 55% of
the 74,000 square foot building. Temple Realty has entered into a long term
lease with a tenant for approximately 25,500 square feet. This lease will
commence on October 1, 2000. Temple Realty expects to lease the remaining space
of approximately 8,500 square feet.
Following the departmental moves to the new building, the Company entered into a
long term lease with a single tenant for a portion of the Bank's headquarters
building in Cambridge. This lease commenced on June 15, 2000. The Bank also
entered into a sublease agreement with a single tenant for the office space in
Newton, formerly occupied by the Company's mortgage division. This sublease
commenced on May 15, 2000 and will terminate on September 30, 2003 when the
Bank's original lease of this space terminates.
The lease for office space formerly occupied by the Bank's telebanking unit
expired on March 31, 2000. The lease for the commercial real estate unit's
former office space will expire on August 31, 2000.
4) Arlington Branch
During the second quarter, the Bank received all regulatory approvals in its
application to open a branch office in Arlington, MA, a town adjacent to
Cambridge. The Bank has leased a branch bank building in Arlington, formerly
occupied by a major Boston-based bank, and opened the branch on August 9.
9
<PAGE>
<TABLE>
<CAPTION>
(5) Loans
The loan portfolio consisted of the following (in thousands):
(Unaudited)
June 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Real estate loans-
Residential $ 342,025 $ 297,709
Commercial 211,866 212,833
Home equity lines of credit 70,828 62,458
Construction 9,787 3,716
---------- ----------
Total real estate loans 634,506 576,716
Commercial 1,224 1,348
Consumer 5,954 6,046
---------- ----------
Total loans 641,684 584,110
Less-
Allowance for possible loan losses 7,538 7,081
---------- ----------
Total loans, net $ 634,146 $ 577,029
========== ==========
</TABLE>
<TABLE>
<CAPTION>
(6) Deposits
A summary of deposit balances, by type, is as follows (in thousands):
(Unaudited)
June 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Demand deposit accounts $ 38,542 $ 29,777
NOW accounts 60,827 44,429
Regular savings accounts 54,912 53,346
Money market accounts 213,225 162,304
--------- ---------
Total noncertificate accounts 367,506 289,856
--------- ---------
Term certificates-
Term certificates less than $100,000 256,132 267,327
Term certificates of $100,000 and over 57,841 61,105
--------- ---------
Total term certificate accounts 313,973 328,432
--------- ---------
Total deposits $ 681,479 $ 618,288
========= =========
</TABLE>
10
<PAGE>
(7) Business Segments:
Reportable segments and reconciliation to consolidated financial
information is as follows:
<TABLE>
<CAPTION>
Community Consolidation
Banking Other Adjustments Consolidated
--------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
(In Thousands)
June 30, 2000:
--------------
Investment securities available
for sale and held to maturity $128,957 $ 41,469 $ (5,666) $164,760
Loans, net 634,146 - - 634,146
Total assets 830,257 156,538 (119,853) 866,942
Total deposits (1) 703,115 - (18,544) 684,571
Total liabilities 740,814 2,110 (25,155) 717,769
Total interest and dividend income 27,442 1,313 - 28,755
Total interest expense 14,539 - - 14,539
Net interest income 12,903 1,313 - 14,216
Provision for possible loan losses 416 - - 416
Total noninterest income 1,135 - - 1,135
Total noninterest expense 10,225 158 - 10,383
Net income 2,156 767 - 2,923
June 30, 1999:
--------------
Investment securities available
for sale and held to maturity $114,407 $ 25,703 $ $140,110
-
Loans, net 522,655 - - 522,655
Total assets 678,668 79,136 (51,523) 706,281
Total deposits (1) 587,614 - - 587,614
Total liabilities 628,704 1,600 (1,559) 628,745
Total interest and dividend income 24,002 774 - 24,776
Total interest expense 12,634 - - 12,634
Net interest income 11,368 774 - 12,142
Provision for possible loan losses 272 - - 272
Total noninterest income 1,348 - - 1,348
Total noninterest expense 8,955 25 - 8,980
Net income 2,203 505 - 2,708
(1) Includes mortgagors' escrow payments
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain statements that may be
considered forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Port Financial Corp.'s actual results could differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, among other factors: changes
in national or regional economic conditions; changes in loan default and charge-
off rates; reductions in deposit levels necessitating increased borrowing to
fund loans and investments; changes in interest rates; changes in the size and
the nature of the Company's competition; and changes in the assumptions used in
making such forward-looking statements.
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and related notes included in this
report.
General
Port Financial Corp. (the "Company") is a Massachusetts-chartered stock holding
Company, which owns all of the capital stock of Cambridgeport Bank (the "Bank").
As part of its conversion, the Company converted from a Massachusetts-chartered
mutual holding company, Cambridgeport Mutual Holding Company, to a
Massachusetts-chartered stock holding company and changed its name to Port
Financial Corp. and sold 7,442,818 shares of its common stock to the Company's
eligible depositors, management and employees and to the Company's Employee
Stock Ownership Plan ("ESOP"). Net proceeds of the stock offering were $71.8
million. The conversion and stock offering was completed on April 11, 2000.
The Company's principal business is its investment in the Bank, which is a
Massachusetts-chartered stock savings bank, chartered in 1853. The Bank is a
community-oriented Bank providing retail and business customers with value-
driven products and services to meet customer needs. It provides a wide variety
of deposit products, residential mortgage loans, commercial real estate loans,
commercial loans and consumer loans to its customers in the cities and towns
around Cambridge, Massachusetts. Over the past five years, the Bank has more
than doubled its branch network from four full service offices to ten full
service offices and one TeleBanking Center. The Bank has strategically located
its branch offices in cities and towns with a strong base for real estate
lending and deposit growth and where community bank competition has been reduced
by a consolidating banking industry. The Bank's branch expansion has increased
its customer base and allowed the Bank to increase its profitability by shifting
its mix of assets more towards higher yielding loans relative to investment
securities. During the second quarter of 2000, the Bank received regulatory
approval to open a branch office in Arlington, and opened the office on August
9, 2000.
12
<PAGE>
The Bank's revenues are derived principally from interest on loans and
investment securities. The Bank's primary sources of funds are deposits,
scheduled amortization and prepayments of loan principal and mortgage-backed
securities, maturities and calls of investment securities, and funds provided by
operations. The Bank also uses borrowings from the Federal Home Loan Bank as a
source of funds for loans, investments and other assets. The largest component
of the Bank's expenses is the interest that it pays on deposits.
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets increased by $104.2 million from $762.7 million at December 31,
1999 to $866.9 million at June 30, 2000. This growth included $57.1 million of
loans, $34.2 million of cash and investment securities, and $10.5 million of
fixed assets. The growth in assets was funded by proceeds from the stock
offering and an increase in deposits, both of which are discussed below.
The loan growth occurred primarily in the residential mortgage portfolio and, to
a lesser extent, in the home equity and construction portfolios. Residential
mortgages rose $44.3 million, reflecting the favorable economic conditions
during the period as well as a trend in the market towards more adjustable rate
mortgages, which the Bank retains in its portfolio. Home equity credit lines
outstanding increased $8.4 million during the six months ended June 30, 2000.
The Bank continues to promote its Home Equity Credit Line product through
advertising, direct mail and in-branch promotions. Commercial construction
loans rose $6.1 million during the six months ended June 30, 2000. Loan
portfolio growth was partially offset by a $1.2 million decrease in the
commercial real estate, consumer and commercial segments, the result of property
sales and scheduled amortization in these portfolios.
Total non-performing assets were $96,000 and $128,000 at June 30, 2000 and
December 31, 1999, respectively. The allowance for loan losses was $7.5 million
at June 30, 2000, or 1.17% of total loans. At December 31, 1999, the allowance
for loan losses was $7.1 million, representing 1.21% of total loans.
The increase in cash and investments securities of $34.2 million results from
the deployment of the capital raised in the subscription offering.
The growth in premises and equipment of $10.5 million reflects the Company's
investment in its new administrative center building. Building construction was
largely completed during the second quarter, and the Company completed the move
of all administrative and loan departments, which now occupy approximately half
of the building.
13
<PAGE>
Deposits at June 30, 2000 totaled $681.5 million, an increase of $63.2 million,
or 10.22%, compared with $618.3 million at December 31, 1999. The increase in
deposits during the first half of 2000 resulted primarily from the
implementation of the Company's strategy to build deposits by expanding the
number of core deposit relationships. As part of this strategy, the Company
actively promoted its Treasury Index money market account during the first
quarter of this year. During the second quarter, the Company introduced its
REAL BANKING marketing campaign, which offers a variety of banking products to
customers who maintain their core checking account with the Bank. As a result
of these marketing promotions, money market account balances have increased
$50.9 million, or 31.4%, since December 31, 1999, while checking deposits have
risen $25.2 million, or 33.9% during the same period.
Time deposit balances ended the period at $314.0 million, down $14.4 million
from December 31, 1999. This reduction reflects movement of customer funds from
time deposits into other account types, as well as the intense competition for
time deposits among area financial institutions.
At June 30, 2000, borrowings from the Federal Home Loan Bank declined by $29.7
million, to $26.2 million, as compared to $55.9 million at December 31, 1999.
The Bank repaid maturing borrowings with the proceeds of the stock offering and
growth in deposits.
The increase in stockholders' equity of $70.0 million to $149.2 million at June
30, 2000 resulted from the net proceeds of the stock offering, totaling $71.8
million, and net income of $2.9 million for the six month period. These
increases were partially offset by $4.7 million of stock purchases for the
Company's Employee Stock Ownership Plan ("ESOP").
Comparison of Operating Results for the Quarters Ended June 30, 2000 and June
30, 1999
Net income was $1.8 million for the recent quarter, or $.25 per share, compared
to $1.3 million for the comparable prior year period. The 2000 results include
increases of $1.6 million in net interest income, $98,000 in non-interest
income, and $930,000 in non-interest expense.
Interest Income
Interest income increased $2.6 million, or 21.3%, to $15.1 million. This
increase resulted primarily from growth in interest-earning assets of $124.4
million, or 18.2%. Also, the yield on average interest-earning assets rose by
21 basis points in the 2000 period. The higher yield reflects a general rise in
interest rates that occurred in the latter half of 1999 and the first half of
2000. The principal area of growth in average asset balances was the loan
portfolio, where average balances were $615.2 million in the 2000 period, an
increase of $95.8 million from the same period in 1999. The average yield on
loans during the recent quarter was 7.78%, compared with 7.68% in the 1999
period.
14
<PAGE>
The average balance in the investment portfolio was $192.2 million in the recent
quarter compared with $163.7 million in the 1999 period. This reflects the
deployment of net proceeds from the stock offering. The overall yield in the
2000 quarter was 6.59%, up 53 basis points from the comparable 1999 quarter,
reflecting the higher interest rate environment this year.
Interest expense
Total interest expense for the three months ended June 30, 2000 was $7.3
million, an increase of $1.0 million, or 15.8% over the same period in 1999.
This increase was due primarily to higher average balances of interest bearing
liabilities, which averaged $660.9 million in the recent quarter, an increase of
$65.4 million over last year. Deposits accounted for $60.1 million of this
increase, the result of recent growth in money market and checking account
balances, which is discussed above. Borrowings averaged $43.7 million, an
increase of $5.3 million over the 1999 period. The primary reason for this
increase was the advance of $14.5 million, which was borrowed from the Federal
Home Loan Bank in June, 1999 to finance the construction of the administrative
center building. The fact that this borrowing was outstanding for only a
portion of the 1999 quarter lowered the average balance in that period.
The cost of interest bearing liabilities rose 20 basis points to 4.47%.
Deposit costs rose 30 basis points from 4.17% in the 1999 period to 4.47% in the
second quarter of 2000. This increase resulted from a growth in average
balances of higher rate money market accounts. It also reflected higher US
Treasury bill yields during the second quarter of 2000, which are the index used
for the Treasury Index money market account.
As discussed above, the Bank borrowed $14.5 million from the Federal Home Loan
Bank in June 1999, to fund construction and acquisition of its new
administration center building. During the second quarter of 2000, $214,741 of
interest paid on this loan was capitalized as part of the cost of the building.
Net interest income
Net interest income increased 27.1% or $1.6 million. The principal reason for
this increase was the stock offering proceeds, which were used to fund loans and
investments. The net interest margin was 3.82%, up 27 basis points from 3.55%
in the second quarter of 1999. The interest rate spread was 3.03% in the recent
quarter, compared with 3.02% last year.
Provision for Possible Loan Losses
The Company recorded a provision for loan losses of $250,000 for the quarter
ended June 30, 2000 and $132,000 in the same quarter of 1999. This increase in
the provision for possible loan losses reflects continued loan portfolio growth.
At June 30, 2000 the allowance for possible loan losses stood at $7.5 million,
or 1.17% of total loans, compared with $7.1 million, or 1.21% of total loans, at
June 30, 1999.
15
<PAGE>
Non-Interest Income
Non-interest income totaled $749,000 in the second quarter of 2000 as compared
to $651,000 in the second quarter of 1999, an increase of $98,000 or 15.0%.
Customer service fees of $254,000 were up $39,000, or 18%, over the 1999
quarter. This is largely the result of checking account fees. The Bank has
seen an increase in the number of new checking accounts, the result of the
Company's strategy to attract new checking account customers who have been
affected by the large Company merger activity in the region. Loan sale gains of
$51,000 represents a decline of $126,000 from the 1999 period. Loan sale gains
are generated from the sale of fixed rate residential mortgages. The low
interest rate environment that prevailed in the second quarter of 1999 produced
a high level of fixed rate mortgage applications, which in turn resulted in loan
sale gains. As interest rates rose, the number of fixed rate mortgage
applications declined in late 1999 and 2000, which has reduced the opportunity
for loan sale gains.
Other non-interest income was $317,000 in the recent quarter, up $175,000 over
the 1999 period. The 2000 period includes a $70,000 gain on sale of furniture
related to departmental moves into the new building. It also includes an
increase of $47,000 in the cash surrender value of life insurance policies, and
$18,000 of rental income from the tenant occupying space at the Bank's Cambridge
headquarters building, under a lease that commenced on June 15, 2000.
Non-Interest Expense
Non-interest expense increased $930,000, or 20.6%, to $5.4 million for the three
months ended June 30, 2000 compared to the same period in 1999. Salary and
benefit costs rose $631,000, reflecting the additional staff for business
banking and other new business initiatives, as well as annual wage adjustments.
The 2000 period included an additional pay period for non-officer staff, which
increased expenses by approximately $180,000 compared with the 1999 period.
ESOP expense of $59,000 was also included in the recent quarter.
Occupancy and equipment expense was $960,000 compared with $843,000 in 1999.
This $117,000 increase includes a $27,000 quarterly property tax payment on the
new building and an accrual of $80,000 for operating costs at the building.
Future property taxes and other building-related operating expenses will be
shared with tenants in both the new building and at the Bank's building in
Cambridge.
The annualized expense ratio, the ratio of non-interest expense to average
assets, was 2.57% for the three months ended June 30, 2000, as compared to 2.56%
for the 1999 period.
Provision for Income Taxes
The Company's effective tax rate for the June 30, 2000 quarter was 35.0% as
compared to 35.85% for the same 1999 quarter. The impact of state taxation has
been reduced as a result of investment activity in the Bank's and Company's
security Corporations.
16
<PAGE>
Comparison of Operating Results for Six Months Ended June 30, 2000 and June 30,
1999
Net income was $2.9 million for the six months ended June 30, 2000 compared to
net income of $2.7 million for the first half of 1999. The 2000 results include
an increase of $2.1 million in net interest income, offset by a decrease of
$213,000 in non-interest income an increase of $144,000 in provision expense and
a $1.4 million increase in non-interest expense.
Interest Income
Interest income was $28.8 million, representing a $4.0 million increase, or
16.0%, over the 1999 results. Growth in the average balance of interest-earning
assets totaling $100.7 million, or 14.9%, is the primary reason for the higher
level of interest income. The yield on earning assets also rose by 4 basis
points, reflecting the higher rate environment prevailing in the first half of
2000. The principal area of growth was the loan portfolio, with an average
balance of $600.2 million in the first half of 2000, representing an increase of
$87.2 million, or 17%, over the average balance of $513.1 million in the 1999
period. Residential mortgages made up $59.6 million of this growth, a
reflection of the strong regional economic conditions and the Company's strategy
to originate and hold adjustable rate mortgages in the portfolio. Commercial
real estate balances averaged $216.3 million in the first half of 2000, compared
to $199.7 million in the 1999 period. The Company's strategy includes expansion
of commercial real estate lending, without compromising its underwriting
standards. The average balance of the home equity portfolio also grew by $12.0
million, to $65.7 million in the 2000 period. This is the result of the
Company's marketing programs featuring the home equity product.
The investment portfolio averaged $176.1 million, $13.5 million higher than the
1999 period. Most of the portfolio growth occurred after the stock offering,
which provided funding for the purchase of investment securities. The overall
yield in the 2000 period was 6.49%, an increase of 47 basis points from the
first half of 1999, reflecting the higher interest rate environment this year.
Interest Expense
Total interest expense for the six months ended June 30, 2000 was $14.5 million,
an increase of $1.9 million, or 15.1%, over the same period in 1999, due
primarily to higher average balances of interest bearing liabilities, which
averaged $659.7 million this year, an increase of $70.8 million over last year's
average balance of $588.9 million. Interest bearing deposits accounted for
$59.6 million of this increase, the result of recent growth in money market and
checking account balances, which is discussed above. Borrowings averaged $48.8
million, an increase of $11.2 million over the 1999 period. The $14.5 million
Federal Home Loan Bank advance, used to finance the construction of the
administrative center building, was outstanding for only one month of the 1999
period, but was fully outstanding in the 2000 period. During the first six
months of 2000, $366,501 of interest paid on this loan was capitalized as part
of the cost of the building.
17
<PAGE>
The cost of average interest bearing liabilities rose 10 basis points to 4.43%.
Deposit costs rose 18 basis points from 4.23% in the 1999 period to 4.41% in the
second quarter of 2000. This results from the growth in higher rate money
market account balances and the higher US Treasury bill yields during the second
quarter of 2000, which is the index used for the Treasury Index money market
account.
Net interest income
The principal reason for the $2.1 million increase was the stock offering
proceeds, which were used to fund loan and investment portfolio growth. The net
interest margin was 3.65%, up 4 basis points from 3.61% in the 1999 period. The
interest rate spread was 2.91% in the 2000 period, compared with 2.97% last
year.
Provision for Possible Loan Losses
The provision for loan losses of $416,000 in the first half of 2000 represents
an increase of $144,000 over the 1999 period, and reflects the growth in the
loan portfolio.
Non-Interest Income
Non-interest income totaled $1.1 million in the first half of 2000, down from
$1.3 million a year earlier. The major factor was a decline in loan sale gains
totaling $346,000 from the 1999 period. The low interest rate environment that
prevailed during the first half of 1999 produced a high level of fixed rate loan
activity. The Bank generally sells all fixed rate mortgages, servicing
released, into the secondary market, and generates gains on these sales. As
interest rates have risen, fixed rate mortgage production, and loan sales, have
declined.
Non-Interest Expense
Non-interest expense increased $1.4 million, or 15.6%, to $10.4 million for the
2000 period. Salary and benefit costs rose $1.0 million, 21.5% above the first
half of 1999, reflecting the additional staff for business banking and other new
business initiatives, as well as annual wage adjustments.
The annualized expense ratio for the six month periods were 2.55% in 2000 and
2.58% in 1999.
Provision for Income Taxes
The Company's effective tax rate for the June 30, 2000 was 35.79% compared to
36.10% for the 1999 period. The impact of state taxation has been reduced as a
result of investment activity in the Bank's and Company's security Corporations.
18
<PAGE>
<TABLE>
<CAPTION>
Port Financial Corp.
Average Balance Sheet
(Unaudited)
For the Six Months Ending June 30, For the Six Months Ending June 30,
2000 1999
-------- --------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Short term investments(1) $ 18,519 $ 651 7.07% $ 14,138 $ 403 5.75%
Certificates of Deposit 2,994 107 7.19% 5,802 203 7.06%
Investment securities(2) 154,612 4,950 6.41% 142,651 4,281 6.13%
Loans(3) 600,243 23,047 7.59% 513,075 19,889 7.66%
--------- ------- -------- -------
Total interest earning assets 776,368 28,755 7.34% 675,666 24,776 7.30%
------- -------
Total non-interest
earning assets 42,612 24,486
--------- --------
Total assets $ 818,980 $700,152
========= ========
Liabilities and Equity:
interest bearing liabilities:
NOW accounts $ 48,112 $ 324 1.35% $ 38,730 $ 272 1.42%
Savings accounts 54,463 542 2.00% 53,716 554 2.08%
Money market deposit accounts 186,164 4,388 4.74% 137,443 2,568 3.77%
Certificate of deposit accounts 322,137 8,129 5.07% 321,403 8,160 5.12%
--------- ------- -------- -------
Total interest-bearing
deposits 610,876 13,383 4.41% 551,292 11,554 4.23%
Borrowed funds 48,794 1,156 4.69% 37,573 1,080 5.72%
--------- ------- -------- -------
Total interest-bearing
liabilites 659,670 14,539 4.43% 588,865 12,634 4.33%
Noninterest-bearing depsoits 43,263 29,121
Other noninterest-bearing
liabilities 6,988 6,042
--------- --------
Total noninterest
bearing liabilities 50,251 35,163
Total liabilities 709,921 624,028
Total retained earnings 109,059 76,124
--------- --------
Total liabilities and
retained earnings $818,980 $700,152
========= ========
Net interest income $14,216 $12,142
====== =======
Net Interest rate spread (4) 2.91% 2.97%
Net interest margin (5) 3.65% 3.61%
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 118.77 115.30
</TABLE>
(1) Short term investments includes federal sold.
(2) All investments securities are considered available for sale and carried at
market value.
(3) Loans are net of deferred loan origination costs(fees), allowance for
possible loan losses and unadvanced funds.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest earning assets and the weighted average cost of
interest bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest earning assets.
19
<PAGE>
<TABLE>
<CAPTION>
Port Financial Corp.
Rate/Volume Analysis
Six Months Ending
June 30, 2000
Increase/(Decrease)
--------------------------------
Due to
Volume Rate Net
----------- -------- --------
(In thousands)
<S> <C> <C> <C>
Interest earning assets:
Short term investments $ 142 $ 106 $ 248
Certificates of Deposit (100) 4 (96)
Investment securities 466 203 669
Loans 3,337 (179) 3,158
-------- ----- -------
Total interest-earning assets $ 3,845 $ 134 $ 3,979
======== ===== =======
Interest bearing liabilities:
NOW accounts 65 (13) 52
Savings accounts 7 (19) (12)
Money market deposit accounts 1,055 765 1,820
Certificate of deposit accounts 9 (40) (31)
Borrowed funds 191 (115) 76
-------- ----- -------
Total interest bearing liabilities $ 1,327 $ 578 $ 1,905
======== ===== =======
Change in net interest income $ 2,518 $(444) $ 2,074
======== ===== =======
</TABLE>
Liquidity and Capital Resources
The term "liquidity" refers to the Company's ability to generate adequate
amounts of cash to fund loan originations, loan purchases, withdrawals of
deposits and operating expenses. The Company's primary sources of liquidity are
deposits, scheduled amortization and prepayments of loan principal and mortgage
backed securities, maturities and calls of investment securities and funds
provided by operations. The Bank also can borrow funds from the FHLB based on
eligible collateral of loans and securities. The Bank's maximum borrowing
capacity from the FHLB at June 30, 2000 was approximately $236.0 million, net of
borrowings that were already outstanding. In addition, the Bank can enter into
reverse repurchase agreements with approved broker-dealers. Reverse repurchase
agreements are agreements that allow the Bank to borrow money using securities
as collateral.
20
<PAGE>
Liquidity management is both a daily and long term function of business
management. The measure of a Company's liquidity is its ability to meet its
cash commitments at all times with available cash or by conversion of other
assets to cash at a reasonable price. Loan repayments and maturing investment
securities are a relatively predictable source of funds. However, deposit
flows, calls of investment securities and prepayments of loans and mortgage-
backed securities are strongly influenced by interest rates, general and local
economic conditions and competition in the marketplace. These factors reduce
the predictability of the timing of these sources of funds.
At June 30, 2000, the Company exceeded each of the applicable regulatory capital
requirements. The Company's leverage Tier 1 capital was $ 147.3 million, or
28.9% of risk-weighted assets, and 17.3% of average assets. The Company had a
risk-based total capital of $ 156.1 million and a risk-based capital ratio of
30.7%.
See the "Consolidated Statements of Cash Flows" in the Unaudited Consolidated
Financial Statements included in this Form 10-Q for the sources and uses of cash
flows for operating and financing activities for the six months ended June 30,
2000 and June 30, 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In Management's opinion, there has been no material change in market risk since
disclosed in Item 7A of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
21
<PAGE>
Part II -- OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
None
Item 2. Defaults Upon Senior Securities
None
Item 3. Submission of Matters to a Vote of Security Holders
None
Item 4. Other Information
None
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 -- Financial Data Schedule (Filed in electronic
format only)
(b) Reports on Form 8-K
None
22
<PAGE>
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.
Port Financial Corp.
--------------------
(Registrant)
By: /s/ James B. Keegan
-----------------------------
James B. Keegan
Chairman and Chief Executive
Officer
By: /s/ Charles Jeffrey
-----------------------------
Charles Jeffrey
Senior Vice President and
Chief Financial Officer
August 9, 2000
23
