<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
Form 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
-------------
For the fiscal year ended Commission file number
December 31, 1995 0-16510
Portsmouth Bank Shares, Inc.
(Exact name of registrant as specified in its charter)
New Hampshire 02-0417778
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 State Street, Portsmouth, New Hampshire 03801
(Address of principal executive offices) (Zip Code)
(603) 436-6630
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock $.10 par value, and
Common Stock Purchase Rights
(Title of Classes)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
<PAGE> 2
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant as of February 29, 1996 was approximately $63.0
million, based on the closing price on February 29, 1996 of $14.875 per share.
5,624,898 shares of the Registrant's Common Stock were outstanding on
February 29, 1996. This does not give effect to a two percent stock dividend
effected on March 15, 1996.
Portions of the Registrant's 1995 Annual Report to Stockholders are
incorporated by reference into Parts I & II of this report. Portions of the
Registrant's Proxy Statement, dated March 15, 1996 distributed in conjunction
with the Company's 1996 Annual Meeting of Stockholders are incorporated by
reference into Part III of the report.
Exhibit Index on page 26.
<PAGE> 3
<TABLE>
<CAPTION>
Table of Contents
Part I
<S> <C> <C> <C>
Item 1. Business ............................................ 1
(a) General.............................................. 1
(b) Lending Activities................................... 2
(i) General................................... 2
(ii) Residential Real Estate Loans............. 3
(iii) Commercial Real Estate Loans...... 4
(iv) Consumer and Other Loans.................. 4
(v) Origination of Loans...................... 5
(vi) Non-Performing Assets
and Delinquent Loans.................... 5
(c) Investment Activities................................ 6
(d) Source of Funds...................................... 6
(e) Statistical Information.............................. 7
(f) Distribution of Assets, Liabilities
and Stockholders' Equity; Interest
Rates and Interest Differential.................... 7
(i) Investment Portfolio...................... 8
(ii) Loan Portfolio............................ 10
(iii) Maturity of Loans................. 10
(iv) Nonaccrual, Past Due and
Restructured Loans...................... 11
(v) Summary of Loan Loss Experience........... 12
(vi) Allowance for Loan Losses................. 13
(vii) Deposits.......................... 13
(viii) Maturities of Time Deposits.................. 13
(ix) Return on Equity and Assets............... 14
(x) Short-Term Borrowings..................... 14
(g) Monetary Policies.................................... 14
(h) Employees............................................ 14
(i) Competition.......................................... 14
(j) Subsidiaries......................................... 15
(k) Regulation........................................... 15
(i) General................................... 15
(ii) Federal Deposit Insurance Corporation..... 15
(iii) New Hampshire Law................. 16
(iv) Federal Interstate Banking Law............... 16
(v) Federal Reserve Board..................... 18
(vi) Capital Requirements...................... 19
(vii) Restrictions on the Payment of
Dividends or Distributions.............. 20
(viii) Federal Home Loan Bank System................ 21
(ix) Other Regulations......................... 21
Item 2. Properties.................................................... 23
Item 3. Legal Proceedings............................................. 23
Item 4. Submission of Matters to a Vote of
Security Holders ........................................... 23
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Part II
<S> <C> <C>
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................. 24
Item 6. Selected Financial Data....................................... 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................................. 24
Item 8. Financial Statements and Supplementary Data................... 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 24
Part III
Item 10. Directors and Executive Officers of the
Registrant................................................. 25
Item 11. Executive Compensation........................................ 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 25
Item 13. Certain Relationships and Related Transactions................ 25
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................................... 26
</TABLE>
<PAGE> 5
PART I
Item 1. Business
General
Portsmouth Bank Shares, Inc. ("Portsmouth" or the "Company"), a New
Hampshire corporation, was formed in November 1987 for the purpose of becoming
the parent holding company of Portsmouth Savings Bank (the "Bank"). The Company
is registered with the Federal Reserve Board as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act").
The Company conducts its business primarily through the Bank, its
wholly-owned subsidiary. The principal business of the Bank is attracting
deposits from the general public and investing in residential and commercial
real estate loans, consumer loans and a portfolio of conservative investments.
As a holding company, Portsmouth has the flexibility, within the constraints of
the Bank Holding Company Act, to diversify its business activities through
formation of subsidiaries and through acquisitions of or mergers with financial
institutions and other companies. There are currently no specific plans,
arrangements or understandings regarding any such diversification or acquisition
activities nor in the foreseeable future.
The Bank, an FDIC-insured savings institution, was organized in 1823 and is
the oldest state-chartered savings bank in New Hampshire. It operates through
its principal office at 333 State Street, Portsmouth, New Hampshire, and two
branch offices in Greenland and North Hampton, New Hampshire. All of the Bank's
offices are in Rockingham County, New Hampshire. The Bank's lending activities
and depositor base extend into Strafford County, New Hampshire and York County,
Maine.
The Bank's lending policies focus on loan quality and close monitoring of
the loan portfolio by management. The Board of Directors review significant loan
applications prior to approval. The Bank maintains a large investment portfolio
and its investment policies stress safety and liquidity. In order to protect its
net interest margin against significant fluctuations, the Bank seeks, where
possible, to better match the interest rate sensitivity and maturities of its
assets and liabilities.
The Bank's investment policy emphasizes liquidity and preservation of
capital. The Board of Directors participates with management in all significant
investment decisions. Investments are primarily in short-term, liquid assets in
order to minimize the effects on its portfolio of changes in interest rates.
The excess of the Bank's interest-earning assets maturing or repricing
within one year over its interest-bearing liabilities maturing or repricing
within one year (the "gap") was a positive $31.8 million (12.7%) of earning
assets at December 31, 1995. In making this calculation, the Bank assumes that
approximately 29% of its regular savings, money markets and NOW accounts reprice
within one year. The Bank regularly, at least monthly, reviews and evaluates its
asset-liability (Gap) position and policy guidelines. Quarterly, the Bank
consults with its independent investment advisor, reviewing the policy
guidelines
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<PAGE> 6
and means to better match interest sensitive assets and liabilities within the
policy guidelines. In setting the guidelines for the policy's time horizons, the
following are the major factors considered: 1) projected interest rates; 2)
run-off or growth of "Core Deposits" (regular savings, money market and NOW
accounts); 3) competitive restraints to rate changes; 4) historical trends 5)
availability of qualified investments at acceptable rates and maturities; 6)
maintaining a diversified asset mix and 7) lack of brokered deposits. The Bank
has in recent years significantly increased its investments in U.S. Treasury and
government agency securities, as well as corporate securities. Offsetting this
increase, interest-bearing deposits with other banks have declined substantially
and outstanding loan balances have diminished. This change in asset-liability
strategy reflects a continued weak local economy. The Bank is currently writing
substantially all of its newly originated fixed-rate mortgage loans to meet the
requirements for sale in the secondary market. No sales in the secondary market
were made in 1995.
The Bank's deposits are insured by the FDIC up to $100,000 per insured
depositor. At December 31, 1995 the Bank had a total regulatory capital ratio of
41.40%, which exceeds the 8% FDIC requirement. At December 31, 1995, the Bank's
ratio of net worth to assets was 25.36%.
The Bank currently competes for both deposits and loans with many other
savings banks, commercial banks, savings and loan associations and credit unions
with offices in and around the Portsmouth area. The Bank maintains its market
position by offering very competitive rates for deposits and loans as well as a
full complement of banking services and other retail financial services for
individuals and small businesses.
LENDING ACTIVITIES
General
At December 31, 1995, the Bank's loan portfolio totaled $77.9 million,
representing approximately 39.8% of the Bank's $195.6 million total deposits at
that date. The principal categories of loans in the Bank's portfolio are
residential real estate loans secured by 1-4 family residences; commercial real
estate loans secured by multi-family residential and commercial properties; and
consumer and other loans. The Bank's primary lending activity has been the
origination of residential real estate loans which comprise 75.97% of the
portfolio.
Loans originated by the Bank are subject to certain legal requirements. The
Bank may originate and purchase loans secured by real estate, or other
collateral as authorized under New Hampshire laws and regulations, that are
located in any state or territory of the United States to the same extent and
manner as if the real estate or collateral were located in New Hampshire.
Notwithstanding this nationwide lending authority, the Bank has generally chosen
not to make or purchase loans collateralized by real estate located outside the
states of New Hampshire and Maine. Substantially all of the mortgage loans in
the portfolio are secured by properties located in southeastern New Hampshire
and, to a lesser extent, southern Maine. Moreover, substantially all of the
non-mortgage loan portfolio consists of loans made to residents and businesses
2
<PAGE> 7
located in New Hampshire and York County, Maine.
New Hampshire law imposes various limitations on the amount of loans that
may be made to one borrower. Under regulations promulgated by the Bank
Commissioner of New Hampshire (the "Commissioner"), the Bank may not make any
loan to one borrower, as defined, which exceeds the lesser of 10% of the Bank's
deposits or 100% of its capital. At December 31, 1995, this limit amounted to
$19.6 million. The Bank has not made any loans to any one borrower which exceed
these regulatory limits. The Bank's largest loan outstanding as of December 31,
1995 was a commercial real estate loan in the amount of $987,000. Its largest
single borrower had aggregate loans outstanding of $2.2 million.
The Bank offers adjustable-rate mortgage loans as part of a strategy to
originate loans that are more interest-rate sensitive than traditional
fixed-rate mortgage loans. At December 31, 1995, adjustable-rate loans
(primarily residential mortgage loans) comprised 40.8% or $31.8 million of the
total loan portfolio.
Another aspect of the asset-liability management effort has been a policy
of writing newly-originated fixed-rate residential mortgage loans to meet the
requirements for sale in the secondary market. A substantial amount ($40.7
million) of fixed-rate mortgage loans are carried in the portfolio. During
periods of rising interest rates, the market value of fixed-rate loans may
decline. Presently management has no intention of disposing of any significant
portion of its fixed-rate mortgage loan portfolio, any such disposition may
result in the realization of losses, thereby affecting the net worth and net
income of the Bank.
Residential Real Estate Loans
Residential mortgage loans are expected to continue to be the primary
component of the Bank's loan portfolio. At December 31, 1995, the portfolio of
residential mortgage loans totaled $59.1 million, consisting of 1,359 loans. The
average size of such loans was $43,488. These loans come from the Bank's primary
market area and are secured by residences within the same area. The fixed-rate
loan portfolio consists primarily of seasoned loans. Many of these loans are to
customers with established relationships. It is the Bank's policy not to make
residential mortgage loans with a loan-to-value ratio in excess of 80%, except
for permanent mortgage insurance loans (PMI) which can reach 95%.
Virtually all residential real estate loans originated prior to May 1984
were long-term loans with fixed rates. In May 1984, the Bank commenced offering
single-family residential mortgage loans providing for periodic interest rate
adjustments. Such loans amounted to approximately 27.56%, 34.52% and 34.10% of
the permanent single-family residential loans originated by the Bank in 1993,
1994 and 1995 respectively. Although the Bank has attempted to increase the
percentage of adjustable-rate loans it originates as a percentage of total
loans, the number of adjustable-rate loans actually originated depends upon
prevailing market conditions as they affect customer demand for such loans.
The adjustable-rate loans currently offered by the Bank have terms of up to
30 years and an interest rate that adjusts every one, three or five years in
3
<PAGE> 8
accordance with an index based on securities issued by the United States
Government. There is an annual 2% cap on any increase in interest rates, as well
as an overall "life time" cap equal to 6%. The Bank has not engaged in the
practice of using a cap on the loan payments, which could allow the loan balance
to increase rather than decrease, resulting in negative amortization. Although
the Bank may for competitive reasons offer discounts on the interest on its
adjustable-rate residential mortgage loans for up to five years, the Bank
evaluates a borrower's ability to pay at or above the initial contract rate.
The origination of adjustable-rate mortgage loans reduces the risks
associated with changes in interest rates, but such loans involve other risks,
because as interest rates increase the underlying payments by the borrower also
increase, thus increasing the potential for default. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. These risks have not had any adverse effect on the Bank to date.
The Bank continues to originate long-term, fixed-rate loans in order to
provide a full range of products to its customers. Although these loans provide
for repayments of principal over a fixed period of up to 30 years, it is the
Bank's experience that such loans have remained outstanding for a substantially
shorter period of time.
Fire and extended coverage casualty insurance is required in order to
protect the properties securing its residential and other mortgage loans. The
properties securing mortgage loans are appraised by state certified independent
appraisers, and such appraisals are reviewed by senior management and approved
by the Board of Directors.
Commercial Real Estate Loans
Commercial real estate loans are primarily secured by existing properties,
such as apartment buildings and, to a lesser extent, office buildings,
industrial buildings, warehouses and various special purpose properties. At
December 31, 1995, the Bank had $12.9 million of such loans in its portfolio,
the largest outstanding balance of which was $987,000. Loan-to-value ratios on
commercial real estate loans generally do not exceed 75%.
Although terms vary, commercial real estate loans secured by existing
properties generally have maturities of 15 years or less and interest rates that
are tied to the N.Y. prime rate are generally adjustable.
Consumer and Other Loans
The Bank offers both secured and unsecured personal loans, as well as
automobile, boat, home improvement, collateral and government guaranteed
education loans. Consumer loans generally have maturities of up to ten years. At
December 31, 1995, the Bank's portfolio of consumer and other loans totaled $6.0
million, representing 7.71% of all loans. Consumer loans generally have shorter
terms and higher interest rates than first mortgage loans. As the result of the
reclassification of certain types of consumer loans they are now reported as
commercial loans, and the second morgages and home equity loans are included
with mortgage loans.
4
<PAGE> 9
Origination of Loans
The Bank's lending activities are conducted primarily in its market area.
Applications for all types of loans are taken at the Bank's principal and branch
offices. Residential loan applications are primarily attributable to referrals
from real estate brokers, whom the Bank actively solicits, and, to a lesser
extent, builders, existing customers and walk-in customers. Commercial real
estate applications are obtained primarily from previous borrowers, direct
contacts and referrals. Consumer applications are primarily obtained through
existing customers who have been made aware of the Bank's programs by cross-
selling, advertising and other means.
Senior management is closely involved in the review and approval of first
mortgage real estate loans. All applications for such loans must be reviewed by
the appropriate loan officer and either the Chairman or the President, and
presented to the Board of Directors for approval. The Bank's loan underwriting
process includes the use of detailed credit applications, property appraisals,
and verification of applicants' credit history, employment and banking
relationships. All property securing real estate loans is appraised by state
certified independent appraisers.
The consumer loan policy provides that collateral loans up to $40,000
may be approved by certain loan officers. Collateral loans greater than $40,000
require the approval of the Board of Directors. Unsecured loans up to $12,000
maybe extended upon the approval of certain officers; and loans over $12,000
require the approval of the Board of Directors.
Although, at a minimum, the loan officers abide by this written policy, in
practice the senior officers consult with the Chairman or President of the Bank
on a daily basis. All significant loan applications are then brought before the
entire Board of Directors for approval. The Bank believes that this centralized
approach to reviewing loan applications has proved beneficial to both the Bank
and its customers.
NON-PERFORMING ASSETS AND DELINQUENT LOANS
The Bank's lending policy focuses on loan quality and close monitoring of
the loan portfolio by management. As a result of this lending policy, the Bank
has experienced minimal loan charge-offs and delinquencies. For the year 1995,
the Bank had net charge-offs of $40,000. At December 31, 1995, the Bank had four
non-performing loans in its $77.9 million loan portfolio totaling $483,000.
Mortgage loans are classified as delinquent when any payment of principal and/or
interest is 30 days or more past due. Consumer loans are classified as
delinquent when any payment is 30 days or more past due. Loans are classified as
non-performing when the Bank ceases to accrue interest thereon. While the Bank
has generally been able to work out satisfactory repayment schedules with
delinquent borrowers, the Bank will undertake foreclosure or other legal
proceedings if a loan delinquency is not otherwise satisfactorily resolved. Real
estate acquired as a result of foreclosure action amounted to $668,000 at
December 31, 1995. The properties are being actively marketed and the balance of
these properties was reduced to $236,000 as of March 1, 1996.
5
<PAGE> 10
INVESTMENT ACTIVITIES
The Bank's investment policy emphasizes liquidity and preservation of
capital. The Board of Directors participates with management in all significant
investment decisions and is counseled by a professional independent investment
adviser. As part of its asset-liability restructuring program, the Bank
maintains a sizeable investment portfolio amounting to $123.4 million or 46.2%
of its total assets at December 31, 1995. The Bank invests in United States
government and agency obligations, corporate bonds that are of investment grade
or higher and in conservative income-oriented equity securities. The Bank's
equity portfolio had amortized cost and fair values of $12.2 million and $14.6
million, respectively, at December 31, 1995. The balance of the Bank's
investment securities had amortized cost and fair market values of $105.42
million and $108.70 million, respectively. The Bank has substantially increased
its investment in interest- bearing deposits with the Federal Home Loan Bank
(the "FHLB") to $55.5 million at December 31, 1995 as call provisions were
exercised by the issuers of agency obligations. These deposits totaled $9.1
million at December 31, 1994.
In addition to providing liquidity and opportunities to enhance the
repricing characteristics of the Bank's earning assets, the investment portfolio
provides an important source of recurring income. For the years ended December
31, 1995 and 1994, the Bank's investment portfolio generated 63.5% and 62.6%,
respectively, of total interest and dividend income. The Bank's investment
portfolio earned 7.02% on taxable investment securities and 4.77% on tax-exempt
securities in 1995, while earning 6.76% and 3.43%, respectively, on such
securities in 1994. The Bank's interest-bearing deposits with the FHLB earned
5.91% in 1995 and 4.06% in 1994. It is management's intent to hold securities on
a long-term basis or until maturity; however, securities may be traded whenever
the opportunity is presented so long as it is consistent with our investment
policy and the categorization of the portfolio for financial reporting purposes.
SOURCE OF FUNDS
Deposits obtained through its banking offices have traditionally been the
principal source of funds for use in lending and for other general business
purposes. To a lesser extent, funds are also derived from amortization and
prepayments of outstanding loans and maturities of investment securities.
The Bank's current deposit products include passbook savings and club
accounts, demand accounts, NOW accounts, money market deposit accounts and
certificates of deposit ranging in terms from three months to three years.
Included among these deposit products are Individual Retirement Account
Certificates and Keogh Retirement Certificates (collectively "retirement
accounts"). In recent years market conditions have required the Bank to increase
its emphasis on short-term certificate accounts and other types of deposit
accounts that are more responsive to changes in market interest rates.
The primary source of deposits are obtained from individual and
business residents within the Bank's market area. Its longstanding presence in
this market area has resulted in a loyal, stable depositor base. Deposit
accounts are
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attracted by offering competitive interest rates, and convenient office
locations and service hours. Deposits of the Bank totaled $195.6 million or
73.2% of its total assets at December 31, 1995.
Deposit account interest rates are priced to be competitive with other
financial institutions conducting business in its market area. The ability of
the Bank to attract and maintain deposits and control the Bank's overall cost of
funds has been and will continue to be significantly affected by economic and
competitive conditions.
The Bank is a member of the Federal Home Loan Bank. The FHLB makes advances
to members in accordance with the policies and procedures established by its
Board of Directors.
STATISTICAL INFORMATION
The statistical information on Portsmouth set forth in the following
sections is furnished pursuant to Industry Guide 3 under the Securities Exchange
Act of 1934.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Certain information regarding the distribution of assets, liabilities and
stockholders' equity, interest rates and interest differential appears under the
headings "Liquidity and Interest Rate Sensitivity Management" and "Interest Rate
Spreads" on pages 4 through 6 of the Company's 1995 Annual Report to
Stockholders, filed as Exhibit 13 hereto, which pages are incorporated therein
by reference.
Additional information concerning the development of the Bank's business is
contained in pages 3 through 9 of the Company's 1995 Annual Report to
Stockholders, filed as Exhibit 13 hereto, which pages are incorporated herein by
reference.
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<PAGE> 12
Investment Portfolio
The following table sets forth the aggregate carrying amounts and/or fair values
of investments in securities of the Company at the dates indicated in accordance
with SFAS No. 115. See Note 3 of the Notes to Consolidated Financial Statements
contained on page 18 of the Company's 1995 Annual Report to Stockholders, filed
as Exhibit 13 hereto, which page is incorporated herein by reference, for
additional information.
<TABLE>
<CAPTION>
December 31
(in thousands)
Available for sale - at fair value 1995 1994
- ---------------------------------- ---- ----
<S> <C> <C>
U.S. Government and
agency obligations $62,717 $ 68,337
State and municipal
obligations 0 0
Other debt securities 26,016 27,499
Marketable equity
securities 13,711 13,992
------ -------
Total $102,444 $109,828
-------- --------
Held to maturity - at carrying amounts
- --------------------------------------
U.S. Government and
agency obligations $ 14,999 $ 29,700
State and municipal
Obligations 570 1,590
Other debt securities 4,546 12,914
Marketable equity
securities 0 0
------ --------
Total $ 20,115 $44,204
------- -------
Federal Home Loan Bank stock $ 874 $ 874
- ---------------------------- ------- -------
Grand Total $123,433 $154,906
======== ========
</TABLE>
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<PAGE> 13
Investment Portfolio (continued)
The following table sets forth the carrying values of the investment securities
portfolio of the Company at the dates indicated, prior to the adoption of SFAS
No. 115.
<TABLE>
<CAPTION>
December 31, 1993
(dollars in thousands)
<S> <C>
U.S. Government and
agency obligations $ 92,419
State and municipal
obligations 7,913
Other debt securities 38,695
Marketable equity
securities 11,157
------
Total $150,184
========
</TABLE>
The following table sets forth by maturities of investment securities at
December 31, 1995, exclusive of marketable equity securities, and the weighted
average yields of such securities (calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security). Yields
on tax exempt obligations have not been computed on a tax equivalent basis.
<TABLE>
<CAPTION>
After One After Five
Within One But Within But Within After Ten
Year Five Years Ten Years Years
---------- ---------- ---------- ---------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and agency
obligations $28,012 6.77% $26,542 7.81% $20,652 7.41% $578 10.53%
State and
municipal
obligations 570 5.41%
Other debt
securities 11,905 7.13% 13,682 7.25% 3,491 7.60%
------- ------- ------- ----
TOTAL $40,487 6.84% $40,224 7.66% $24,143 7.44% $578 10.53%
======= ======= ======= ====
</TABLE>
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Loan Portfolio
The following table shows Portsmouth's loan distribution at the end of each
of the last five years (before deduction of unearned income).
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial $ 424 $ 2,386 $ 411 $ 5,450 $ 420
and agricultural
Real estate - 59,143 59,979 62,371 71,862 80,943
residential
Real estate - 12,265 11,651 13,447 12,263 12,421
commercial
& construction
Installment 3,975 4,050 2,476 2,899 3,992
Other 2,045 2,119 2,128 2,135 2,304
----- ----- ----- ----- -----
TOTAL LOANS $77,852 $80,185 $80,833 $94,609 $100,080
======= ======= ======= ======= ========
</TABLE>
Maturity of Loans
The following table sets forth the scheduled contractual amortization of
loans in the Company's portfolio at December 31, 1995, and the dollar amount of
loans at that date which are scheduled to mature after one year which have fixed
or adjustable interest rates. Adjustable or floating rate assets are included in
the period in which interest rates are next scheduled to adjust rather than the
period in which they are due.
<TABLE>
<CAPTION>
Maturing
--------------------------------------------------------------------------
After 1 Year
Within But Within After 5
1 Year 5 Years Years Total
------ ----------- ------- ------
(in thousands)
<S> <C> <C> <C> <C>
Commercial, $ 104 $ 253 $ 67 424
financial and
agricultural
Real estate - 15,834 5,278 38,031 59,143
residential
Real estate - 6,732 2,297 3,236 12,265
commercial
& construction
Installment 329 2,993 653 3,975
Other 2,045 0 0 2,045
------ ------ ------- ------
$25,044 $10,821 $41,987 $77,852
======= ======= ======= =======
Loans maturing after 1 year with:
Fixed interest rates $6,431 $41,439
Variable interest rates 4,390 548
------ ------
$10,821 $41,987
======= =======
</TABLE>
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Nonaccrual, Past Due, and Restructured Loans
The following table summarizes Portsmouth's nonaccrual, past due, and
restructured loans.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $483 $ 55 $215 $321 $110
Accruing loans past 44 253 84 326 970
due 90 days or more
Restructured loans 0 0 0 0 $804
1995
----
Nonaccrual loans:
Commercial (2) $264
Residential real estate (2) 219
---
Total $483
----
</TABLE>
Had these loans performed under their original terms, the amount of
interest income recorded would have been $39,000. The amount recorded during
1995 amounted to $7,000.
Management's policy is to review loans that are 90 days past due to
determine the future collectibility of both principal and interest. When income
is determined to be uncollectible, the loan is put on a nonaccrual status.
As of December 31, 1995, there were no potential problem loans which
management reasonably expects will materially impact future operating results,
liquidity or capital resources, or represent material credits which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms. There were no loan concentrations exceeding 10%
of total loans.
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Summary of Loan Loss Experience
The following table summarizes Portsmouth's loan loss experience for each
of the five years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $767 $807 $843 $865 $833
Charge-offs:
Commercial, financial and 0 0 0 0 128
agricultural
Real estate-
commercial 0 0 92 90
residential 41 40 0 133
Consumer loans 0 0 15 0 3
Other 0 0 0 0 0
---- ---- ---- ---- ----
Total Charge-Offs 41 40 107 223 131
Recoveries:
Commercial, financial and 0
agricultural
Real estate - 0
commercial
residential 1
Consumer loans 0
Other
---- ---- ---- ---- ----
Total Recoveries 1 0 0 0 0
Net Charge-offs 40 40 107 223 131
Provision for loan losses 0 0 71 201 163
--- --- ---- ---- ----
Balance at end of year $727 $767 $807 $843 $865
==== ==== ==== ==== ====
Ratio of net charge-offs
during year to average loans
outstanding 0.05% 0.05% 0.13% 0.24% 0.13%
</TABLE>
The foregoing schedule should be read in conjunction with the following
footnotes:
(1) The amount charged to operations and the related balance in the allowance
for loan losses is based upon monthly evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience and management's estimation of future potential losses.
(2) Based on historical data, management has no reason to believe that net
charge-offs, as a percentage of average loans outstanding by category, will
fluctuate materially during 1996.
12
<PAGE> 17
Allowance for Loan Losses
Portsmouth's lending policy focuses on loan quality, primarily in its
market area, and close monitoring of the loan portfolio by management.
Management reviews on a monthly basis, using regulatory guidelines and the risk
elements in the loan portfolio in determining the adequacy of the Allowance For
Loan Losses. At December 31, 1995, management believes the balance in the
Allowance For Loan Losses account is adequate to absorb any losses that may be
inherent in the loan portfolio. The approximate anticipated amount of
charge-offs during the next full year of operations total $75,000 from the real
estate loan category. As a result of this lending policy, Portsmouth has
experienced minimal loan charge-offs and delinquencies. From 1991 through 1995,
only $541,000 was charged off for non-performing loans.
Deposits
The average daily balance of deposits and the average rates paid thereon
appear under the headings, "Liquidity and Interest Rate Sensitivity Management"
and "Interest Rate Spreads" on pages 4, 5 and 6 of the Company's 1995 Annual
Report to Stockholders, filed as Exhibit 13 hereto, which pages are incorporated
herein by reference.
Maturities of Time Deposits
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Time
Certificate Other
of Deposit Time Deposits Total
----------- ------------- -----
(dollars in thousands)
<S> <C> <C> <C>
3 months or less $ 3,553 $0 3,553
Over 3 but less than 3,454 0 3,454
6 months
Over 6 but less than 1,578 0 1,578
12 months
Over 12 months 3,853 0 3,853
------- - -----
TOTAL $12,438 $0 $12,438
======= == =======
</TABLE>
13
<PAGE> 18
Return on Equity and Assets
The following table shows operating and capital ratios for 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net income to average assets 2.31% 2.18%
Net income to average stockholders' equity 9.31% 9.21%
Dividend payout ratio 72.74% 68.32%
Average equity to average total assets 25.36% 24.01%
</TABLE>
Short-Term Borrowings
Portsmouth has no material short-term borrowings.
Monetary Policies
Portsmouth and the Bank are affected by the monetary and fiscal policies of
various agencies of the United States Government, including the Federal Reserve
System. In view of changing conditions in the national economy and in the money
markets, it is impossible for the management of Portsmouth to predict accurately
future changes in monetary policy or the effect of such changes on the business
or financial condition of Portsmouth.
EMPLOYEES
As of December 31, 1995, Portsmouth and its subsidiary employed 61
full-time officers and employees. None of its employees are represented by
collective bargaining agents, and management considers relations with its
employees to be good. Two officers of the Bank serve as officers of Portsmouth
but received no renumeration for serving as officers of the Company in 1995.
Portsmouth has no other employees.
COMPETITION
The Company, through the Bank, experiences intense competition in
attracting and retaining deposits and in lending funds throughout its market
area in New Hampshire and southern Maine. The primary factors in competing for
deposits are interest rates, convenient office locations and flexible hours.
Direct competition for deposit accounts comes from bank affiliates or other bank
holding companies, independent commercial banks, mutual savings banks, savings
and loan associations and credit unions. Additional significant competition for
deposits comes from nonbank competitors, such as brokerage firms, and other
investment alternatives such as U.S. government and corporate securities.
14
<PAGE> 19
Competition for loan origination in the Portsmouth area is intense. The
primary factors affecting competition for loans are interest rates, loan
origination fees and the range of lending services offered. Competition for
originations of mortgage loans normally comes from mortgage bankers, savings
institutions, commercial banks and insurance companies. In particular, there are
a significant number of mortgage companies operating in the Bank's market. The
principal competitors for consumer loans are finance company subsidiaries of
domestic automobile manufacturers, commercial banks and, to a lesser degree,
consumer finance companies. As the Bank develops its future operating strategies
toward providing full financial services for customers in its market area it may
face additional competition from diversified financial institutions.
There are a number of pending legislative and regulatory proposals that may
alter the structure, regulations, and competitive relationships of financial
institutions. The ability of Portsmouth and the Bank to remain competitive will
depend on how successfully they can respond to the rapidly evolving competitive,
regulatory, technological and demographic developments affecting their
operations.
SUBSIDIARIES
Portsmouth owns 100% of the capital stock of the Bank. The Company has
no other subsidiaries.
REGULATION
General
Savings banks and bank holding companies are subject to extensive
supervision and regulation. As a New Hampshire-charted Savings Bank and a FDIC-
insured bank, the Bank is subject to regulation and supervision by the New
Hampshire Banking Department and the FDIC.
Portsmouth, as a bank holding company, is subject to regulation,
examination and supervision by the Federal Reserve Board under the Bank Holding
Company Act of 1956. The issuance and sale of its securities and its relations
with its stockholders are subject to regulation by the Securities and Exchange
Commission. The following references to applicable statutes and regulations are
brief summaries thereof and do not purport to be complete.
Federal Deposit Insurance Corporation
The Bank's deposits are insured by the FDIC up to a maximum of $100,000 per
depositor. The FDIC issues regulations, conducts periodic examinations, imposes
minimum capital requirements, requires the filing of reports and generally
supervises the operations of its insured banks. The approval of the FDIC is
required prior to any merger or consolidation, or the establishment or
relocation of a branch. This supervision and regulation is intended primarily
for the protection of depositors.
15
<PAGE> 20
Any insured bank that does not operate in accordance with or conform to
FDIC regulations, policies and directives may be sanctioned for non-compliance.
For example, proceedings may be instituted against any insured bank or any
director, officer or employee of such bank who engages in unsafe and unsound
practices, including the violation of applicable laws and regulations. The FDIC
has the authority to terminate insurance of deposits pursuant to procedures
established for that purpose. The Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDICIA") and regulations promulgated pursuant to
FDICIA have effected a number of regulatory reforms that among other things,
have broadened the authority of federal bank regulatory agencies to take action
against institutions that fail to meet minimum capital requirements or other
applicable standards. See "Capital Requirements."
Under Section 7(b)(2)(A)(iii) of the FDI Act, "The semiannual assessment
for each member of a deposit insurance fund shall not be less than $1,000.00."
The FDI Act has the authority to assess additional premiums to cover its losses
and expenses. The Bank's semiannual assessment for 1996 is $1,000.00 or a total
of $2,000.00 annually.
New Hampshire Law
As a state-chartered savings bank, the Bank is subject to the
applicable provisions of New Hampshire banking law. The Bank derives its lending
and investment powers from these laws and is subject to periodic examination and
reporting requirements imposed by the Commissioner, who also has specific
statutory jurisdiction over certain banking activities such as mergers and the
creation of new powers. New Hampshire has enacted interstate banking legislation
which permits out-of-state banks and bank holding companies to establish new
banks or to affiliate with existing banks and bank holding companies in New
Hampshire. Conversion and the establishment of branches are subject to the
approval of the New Hampshire Board of Trust Company Incorporation.
New Hampshire law prohibits a bank holding company (defined as a company
owning 25% or more of the voting stock of two or more banks) from acquiring any
voting stock of an additional bank if, after such acquisition, the bank holding
company would have more than 12 affiliates in New Hampshire, or if the total
state-wide deposits of such bank holding company and all its affiliates would
exceed 15% of the total deposits of all banks in New Hampshire. Portsmouth is
not subject to such restrictions since it does not come within these
limitations.
Federal Interstate Banking Law
The Riegle-Neal Interstate Bank and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), enacted in September 1994, eliminates many
barriers to: (i) interstate acquisitions by bank holding companies commencing in
1995, and (ii) interstate branching commencing in 1997, subject, in each case,
to the right of individual states to opt out of certain provisions of the
Interstate Banking Act in these regards.
Commencing in September 1995, bank holding companies which meet specified
capital and management adequacy standards are eligible to acquire banks in other
states. Until 1997, an interstate holding company system will need to retain a
separate bank charter in each state where its subsidiaries conduct a banking
business.
Various restrictions on such acquisitions will still apply after 1995,
including (i) federal and state antitrust laws, as currently in effect: (ii)
prohibitions on a single holding company system accounting for more than 10% of
16
<PAGE> 21
all deposits nationwide or, subject to various opt-in and opt-out provisions for
individual states on a nondiscriminatory basis, accounting for 30% or more of
deposits in any state; (iii) state-imposed prohibitions on acquiring banks
within up to five years after they commence operations; and (iv) compliance by
the acquirer with CRA and fair lending laws.
Commencing on June 1, 1997, banks will be permitted to cross state lines to
merge with other banks, subject to individual states' ability to adopt various
nondiscriminatory opt-in and opt-out provisions. It is not yet known whether New
Hampshire will elect to accelerate the effective date of this provision or to
delay such date indefinitely. Antitrust and anticoncentration restrictions will
apply as described above. It will not be necessary to keep multiple state
charters in effect or to have a holding company system. Generally, all banks
that are parties to a proposed post-1997 merger must satisfy applicable CRA,
management quality and capital adequacy standards.
De novo branching across state lines will be permissible if the host state
has a law expressly permitting out-of-state banks to establish de novo branches
in such state, commencing in 1997, state laws restricting branching within a
state will continue to apply to both federally chartered and state chartered
institutions. States may also impose instate standards in such areas as CRA,
fair lending and consumer protection.
17
<PAGE> 22
Federal Reserve Board
The Federal Reserve Board requires the Bank to maintain reserves against
its transaction accounts based on the amount of the Bank's deposits.
Under the Bank Holding Company Act, Portsmouth, as a bank holding company,
is required to file annually with the Federal Reserve Board a report of its
operations and, with its subsidiaries, is subject to examination by the Federal
Reserve Board. The Bank Holding Company Act prohibits a bank holding company
from acquiring direct ownership or control of more than 5% of the voting shares
of any bank, or increasing such ownership or control of any bank, without prior
approval of the Federal Reserve Board. No approval under the Bank Holding
Company Act is required, however, for a bank holding company already owning or
controlling over 50% of the voting shares of a bank to acquire additional shares
of such bank. The Bank Holding Company Act also generally prohibits a bank
holding company from acquiring any bank located outside of the state in which
the existing banking subsidiaries of the bank holding company are located unless
specifically authorized by applicable state law. New Hampshire law does
authorize the acquisition of out-of-state financial institutions by New
Hampshire bank holding companies and of New Hampshire financial institutions by
out-of-state bank holding companies in certain circumstances.
The Bank Holding Company Act further precludes a bank holding company,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any nonbanking entity engaged in any
activity other than those that the Federal Reserve Board has determined to be
closely related to banking or managing and controlling banks so as to be a
proper incident thereto. The Federal Reserve Board has determined that certain
activities, including, but not limited to, mortgage banking, operating small
loan companies, discount brokerage activities, factoring, certain data
processing operations, providing investment and financial advice and leasing
personal property on a full payout basis are closely related to banking so as to
be a proper incident thereto. Portsmouth has not determined whether it will
engage in any of those enumerated activities considered (or which may be
considered in the future) to be closely related to banking so as to be a proper
incident thereto. A bank holding company and its subsidiaries are also
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease, sale of property or furnishing of services.
The acquisition of direct or indirect ownership or control of more than 5%
of the voting shares of Portsmouth or the Bank by any company might require
regulatory approval under the Bank Holding Company Act, and the acquisition of
10% or more by any person or group of persons (including individuals as well as
companies) would be subject to the provisions of the Change in Bank Control Act
of 1978.
Transactions between a depository institution and its holding company are
generally subject to the restrictions contained in Sections 23A and 23B of the
Federal Reserve Act. Section 23A imposed both quantitative and qualitative
restrictions on such transactions, while Section 23B requires, among other
things, that all such transactions be on terms substantially the same, and at
least as favorable to the depository institution, as in a comparable transaction
with an unaffiliated party. Exemption from, and waivers of, the provisions of
Section 23A and 23B of the Federal Reserve Act may be granted only by the Board
of Governors of the Federal Reserve System.
FDICIA requires any company that controls a depository institution that
becomes undercapitalized to guarantee, in connection with the submission of a
18
<PAGE> 23
capital restoration plan by the depository institution, that the institution
will comply with the plan and to provide appropriate assurances of performance.
The aggregate liability of any such controlling company under such guaranty is
limited to the lesser of (i) 5% of the depository institution's assets at the
time it becomes undercapitalized, or (ii) the amount necessary to bring the
depository institution into capital compliance as of the time the institution
fails to comply with the terms of its capital plan.
Capital Requirements
The FDIC and the Federal Reserve Board have adopted minimum capital ratios
and guidelines for banks and bank holding companies (on a consolidated basis) to
provide a framework for assessing the adequacy of capital.
Under its leverage capital adequacy guidelines, the FDIC has required that
insured state banks, such as the Bank, maintain a ratio of tier 1 or core
capital to assets of not less than 3% for banks rated composite 1 under the
FDIC's CAMEL rating system that are not experiencing or anticipating any
significant growth. For all other banks, the minimum core capital leverage ratio
is 3% plus at least an additional 100 to 200 basis points. The FDIC may impose
higher ratios for banks on a case-by-case basis. Banks that fail to meet these
minimum leverage capital levels will not, absent unusual circumstances, receive
FDIC approval of applications to establish new branches or other transactions
requiring approval.
The FDIC has adopted so-called "risk based capital" guidelines for insured
state non-member banks. These risk based guidelines generally require the
Company and the Bank to maintain a consolidated ratio of tier 1 capital to risk-
weighted assets, as defined, of at least 4%, and a consolidated ratio of total
capital (defined as the sum of tier 1 and tier 2 capital, as defined below) to
risk-weighted assets of at least 8%. For this purpose, the Company's total
shareholders' equity will constitute tier 1 capital. Banks which are not rated
composite 1 or 2 will generally be required to maintain higher risk-based
capital ratios determined by the FDIC on a case-by-case basis.
Tier 1 or core capital consists of common stock, surplus, undivided
profits, disclosed capital reserves that represent a segregation of undivided
profits, foreign currency translation adjustments and minority interest in
consolidated subsidiaries less all intangible assets other than certain mortgage
servicing rights. Tier 2 or supplementary capital consists of allowance for loan
and lease losses (up to certain maximums), perpetual preferred stock, long-term
(minimum 20 year maturity) preferred stock, intermediate-term (minimum 5-year
maturity) preferred stock, hybrid capital instruments (including mandatory
convertible securities) and term subordinated debt.
In determining total risk-weighted assets for purposes of the risk-based
capital requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of each
such item by a credit conversion factor ranging from 0% to 100% (depending upon
the nature of the asset), (ii) the credit equivalent amount of each off-balance
sheet asset and the book value of each on-balance sheet asset must be multiplied
by a risk factor ranging from 0% to 200% (again depending upon the nature of the
asset), and (iii) the resulting amounts are added together and constitute total
risk-weighted assets.
FDICIA has required the various federal banking agencies, including the
FDIC, to develop additional guidelines for their risk-based capital standards to
ensure that those standards take adequate account of (i) interest rate risk,
(ii) concentration of credit risk, (iii) the risks of nontraditional activities
19
<PAGE> 24
and (iv) the actual performance and expected risk of loss on multi-family
mortgages. The Company does not believe that its capital ratios will require
material adjustments in light of these standards.
FDICIA defines each institution as either well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized or critically
undercapitalized, imposing progressively more scrutiny and restrictions on an
institution with less favorable capitalization. The definitions are based on an
institution's ability to meet all of the capitalization requirements imposed on
the institution by its primary federal regulator which is, in the case of the
Bank, the FDIC. Well capitalized institutions and adequately capitalized
institutions are defined to be institutions which significantly exceed, or
simply meet, all relevant capital requirements, respectively. Undercapitalized
and significantly undercapitalized banks are defined to be institutions which
fail to meet, or significantly fail to meet, all such capital requirements,
respectively. The level of capital below which an institution is deemed to be
critically undercapitalized may not be less than 2% to total assets nor more
than 65% of the required minimum level of capital under the leverage limit.
Management believes that the Bank was classified at December 31, 1994 as well
capitalized, since it exceeds all applicable minimum capital standards.
Management does not anticipate that the prompt corrective actions required under
FDICIA for undercapitalized institutions (see below) will have a material impact
upon the operations of the Bank as long as current capital levels are
maintained.
Any insured depository institution which falls below the minimum capital
standards must submit a capital restoration plan. In general, undercapitalized
institutions will be precluded from increasing their assets, acquiring other
institutions, establishing additional branches, or engaging in new lines of
business without an approved capital plan and an agency determination that such
actions are consistent with the plan. Institutions that are significantly
undercapitalized or critically undercapitalized are subject to additional
restrictions and may be required to (i) raise additional capital; (ii) limit
asset growth; (iii) limit the amount of interest paid on deposits to the
prevailing rate of interest in the region where the institution is located; (iv)
divest or liquidate any subsidiary which the FDIC determines poses a significant
risk; (v) order a new election for members of the board of directors; (vi)
require the dismissal of a director or senior executive officer, or (vii) take
such other action as the FDIC determines is appropriate. Under FDICIA, the FDIC
is required to appoint a conservator or receiver for a critically
undercapitalized institution no later than 9 months after the institution
becomes critically undercapitalized, subject to a limited exception for
institutions which are in compliance with an approved capital plan and which the
FDIC certifies are not likely to fail.
FDICIA prohibits any depository institution that is not now well
capitalized from accepting deposits through a deposit broker, except that the
FDIC may allow adequately capitalized institutions to accept brokered deposits
for successive periods of up to 90 days. FDICIA also prohibits undercapitalized
institutions from offering rates of interest on insured deposits that
significantly exceed the prevailing rate in their normal market area or the area
in which the deposits would otherwise be accepted.
Restrictions on the Payment of Dividends or Distributions
The New Hampshire Business Corporation Act (the "Business Corporation Act")
permits Portsmouth to pay dividends on its capital stock only from its
unreserved and unrestricted earned surplus or from its net profits for the
current fiscal year and the preceding fiscal year taken as a single period.
20
<PAGE> 25
The Bank is not subject to the Business Corporation Act, but the payment of
a cash dividend or distribution may be restricted if the effect thereof would
cause the net worth of the Bank to be reduced below either the amount required
for the distribution and liquidation account or in the event that net worth
requirements under New Hampshire or federal laws or regulations limit such
dividends or distributions. In addition, the Bank is required under New
Hampshire law to maintain a reserve of not less than 5% of the amount of its
deposits in cash or in specified kinds of short-term investments, for the
security of its depositors. The Commissioner has regulatory authority to reduce,
and has reduced, this reserve from 5% of the amount of deposits in cash or in
specified kinds of short-term investments to 3% of such funds. The Bank has
consistently complied with this requirement. Furthermore, the Federal Deposit
Insurance Act prohibits the Bank from paying dividends on its capital stock if
it is in default in the payment of any assessment to the FDIC.
The Bank is not under any regulatory restrictions regarding retained
earnings available for distribution. At December 31, 1995, $34.32 million could
be distributed in accordance with Rule 4-08 (e) (1) of Regulation S-X.
Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends or distributions
without the prior payment of taxes at the current income tax rates on an amount
greater than the amount appropriated to bad debt reserves.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Boston, which is one of 12 regional
Federal Home Loan Banks. The FHLB serves as a reserve or central bank for its
members. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes advances
to members in accordance with policies and procedures established by the Board
of Directors of the FHLB. The Bank's membership in the FHLB is voluntary and can
be terminated by the Bank at any time when its advances, if any, are paid.
As a member of the FHLB, the Bank is required to purchase and hold stock in
the FHLB in an amount equal to the greater of 1% of the bank's aggregate unpaid
residential mortgage loan balances at the beginning of the year or 1/20th of
FHLB advances outstanding. As of December 31, 1995, the Bank held stock in the
FHLB in the amount of $874,200, which exceeded the above requirements.
Although the Bank is not examined by the FHLB, the Bank, as an FHLB member,
is required to comply with various rules and regulations, including a
requirement that the Bank maintain, if it wishes to borrow from the FHLB, an
average daily balance of liquid assets (consisting of, among other things, cash,
certain time deposits, bankers' acceptances and specified United States
Government, state and federal agency obligations) of not less than a certain
percentage of net withdrawable savings and current short-term borrowings. The
liquidity requirement, currently 5%, may be changed from time to time by the
FHLB to any amount within the range of 4% to 10% depending upon economic
conditions and savings flows of member institutions. Penalties may be imposed
for violations of liquidity requirements. The Bank has consistently complied
with these liquidity requirements.
Other Regulations
The policies of regulatory authorities, including the Federal Reserve
Board and the FDIC, have had a significant effect on the operating results of
financial institutions in the past and are expected to continue to do so in the
future.
21
<PAGE> 26
An important function of the Federal Reserve Board is to regulate aggregate
national credit and money supply through such means as open market operations in
securities, establishment of the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. Policies of these agencies may be
influenced by many factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and fiscal policies of the
United States Government. Supervision, regulation or examination of Portsmouth
by these regulatory agencies is not intended for the protection of Portsmouth's
stockholders.
The United States Congress has periodically considered and adopted
legislation that has resulted and could result in further regulation or
deregulation of banks and other financial institutions. Such legislation could
relax or eliminate geographic restrictions on banks and bank holding companies
and could place Portsmouth in more direct competition with other financial
institutions, including mutual funds, securities brokerage firms and investment
banking firms. No assurance can be given as to whether any additional
legislation will be enacted or as to the effect of such legislation on the
business of Portsmouth.
22
<PAGE> 27
Item 2. Properties
Portsmouth is obligated under certain operating leases incurred in the normal
course of business. A schedule of the minimum annual lease payments is as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996.............................. 8,000
1997.............................. 8,000
1998.............................. 8,000
--------
Total............................. $ 24,000
========
</TABLE>
Portsmouth does not own any property. Portsmouth uses the premises and
equipment of the Bank and does not pay any rental fee for such premises and
equipment. The following tables sets forth information with regard to
properties owned by the Bank. Net book value amounts represent the book value
of land and improvements, after the deduction of accumulated depreciation, on
these properties.
<TABLE>
<CAPTION>
Owned Net Book Value at
Office Location or Leased December 31, 1995
- --------------- --------- -----------------
<S> <C> <C>
333 State Street
Portsmouth, NH
(Main Office of the Bank and
adjacent drive-in parking
facilities.................. Owned $601,326
Fern Avenue
and Route 1
North Hampton, NH........... Owned 113,221
Ocean Road
and Route 33
Greenland, NH............... Owned 151,292
--------
Total $865,839
========
</TABLE>
Item 3. Legal Proceedings
The Company and the Bank are involved in various legal proceedings
incidental to the Bank's business, none of which is believed by management to be
material to the financial condition of the Bank or the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
23
<PAGE> 28
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information required by this item regarding the Company's Common
Stock appears under the heading "Information on Common Stock" on page 1 of the
Company's 1995 Annual Report to Stockholders, filed as Exhibit 13 hereto, which
page is incorporated herein by reference. The payment of dividends by the Bank
to Portsmouth is subject to certain regulatory restrictions. See "Regulations,"
Page 15.
Item 6. Selected Financial Data
The information required by this item is contained on page 9 of the
Company's 1995 Annual Report to Stockholders, filed as Exhibit 13 hereto, which
page is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information required by this item appears under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" on pages 3 through 9 of the Company's 1995 Annual Report to
Stockholders, filed as Exhibit 13 hereto, which pages are incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The information required by this item is contained on pages 10 through
32 of the Company's 1995 Annual Report to Stockholders, filed as Exhibit 13
hereto, which pages are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
24
<PAGE> 29
PART III
Item 10. Directors and Executive Officers of the Registrant
The information pertaining to Directors required by this item appears
under the heading "Election of Directors" on pages 5 through 10 of the Company's
definitive Proxy Statement for the Company's 1996 Annual Meeting of
Stockholders, attached hereto as Exhibit 21 and filed with the Securities and
Exchange Commission (the "Proxy Statement"), dated March 15, 1996 which pages
are incorporated herein by reference.
Set forth below is certain information concerning the executive
officers of the Company.
Harry R. Hart was elected President and Chief Executive Officer of
the Company and Chairman of the Board and Chief Executive Officer of Portsmouth
Savings Bank in November, 1992. Prior to this Mr. Hart served as President of
Portsmouth Savings Bank since 1990. He was Chief Executive Officer and
President of the First National Bank of Litchfield, Connecticut from 1973 to
1988 and Chairman of the Board of that institution from 1988 to 1990.
Mark E. Simpson was elected Treasurer and Secretary in November 1987.
In November 1992, Mr. Simpson was elected President of the Bank. Prior to this
Mr. Simpson served as Executive Vice President of the Bank since 1988.
Previously to his election as Executive President of the Bank, Mr. Simpson
served as Vice President and Treasurer of the Bank from 1985 to 1988 and
Assistant Vice President from 1984 to 1985.
Item 11. Executive Compensation
The information required by this item appears under the heading
"Executive Compensation" on pages 11 through 17 of the Proxy Statement, filed as
Exhibit 21 hereto, which pages are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item appears under the headings
"Beneficial Ownership" and "Election of Directors" on pages 3 through 8 of the
Proxy Statement, filed as Exhibit 21 hereto, which pages are incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item appears under the heading
"Transactions with Management" on page 20 of the Proxy Statement, filed as
Exhibit 21 hereto, which page is incorporated herein by reference.
25
<PAGE> 30
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a) (1) Index of Financial Statements: The following
financial Statements appear in response to item 8 of
this Report on the pages indicated in the Company's
1995 Annual Report to Stockholders, filed as Exhibit
13 hereto, which pages are incorporated herein by
reference.
Report of Independent Certified Accountants, page 10.
Consolidated Balance Sheets as of December 31, 1995
and 1994, page 11.
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993, page 12.
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1995, 1994
and 1993, page 13.
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993, page 14.
Notes to Consolidated Financial Statements, pages 15
through 32.
(a) (2) Index of Financial Statement Schedules: Financial
Statement Schedules required by item 8 of this Report
or as part of this item 14.
Schedule I - Indebtedness to Related Parties. The
information required by this schedule is not material
and is therefore not applicable.
(c) Exhibits: Listed separately on Exhibit Index found
on page page 32.
(c) (3) Articles of Incorporation and By-Laws:
(a) The Articles of Incorporation as amended of the
Company are incorporated by reference to Item 14,
Exhibit 3 (a) to the Company's 1990 Annual Report on
Form 10-K filed with the Securities and Exchange
Commission on March 29, 1991.
(b) The By-Laws of the Company are incorporated herein by
reference to Item 14, Exhibit 3(b) to the Company's
1988 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1989.
(c) (4) Instruments Defining the Rights of Security Holders:
(a) The Articles of Incorporation as amended of the
Company are incorporated by reference to Item 14,
Exhibit 3 (a) to the Company's 1990 Annual Report on
Form 10-K filed with the Securities and Exchange
Commission on March 29, 1991.
26
<PAGE> 31
(b) The By-Laws of the Company are incorporated herein by
reference to Item 14, Exhibit 3(b) to the Company's
1988 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1989.
(c) The Rights Agreement, between the Company and The
First National Bank of Boston, dated as of November
17, 1988, is incorporated herein by reference to Item
2.1 to the Company's Registration Statement on Form
8-A filed with the Securities and Exchange Commission
on November 30, 1988.
(c) (10) Material Contracts:
(a) Agreement among Portsmouth Bank Shares, Inc.,
Portsmouth Savings Bank and Robert W. Simpson is
incorporated herein by reference to Item 16, Exhibit
10.2 to the Company's Registration Statement,
registration number 33-18714, on Form S-1, filed with
the Securities and Exchange Commission on November
25, 1987.
(b) Amended and Restated Agreement among Portsmouth Bank
Shares, Inc., Portsmouth Savings Bank and Robert W.
Simpson is incorporated herein by reference to Item
14, Exhibit 10(b) to the Company's Annual Report on
Form 10-K filed with the Securities and Exchange
Commission on March 30, 1990.
(c) Employment Agreement between Portsmouth Savings Bank
and Robert W. Simpson; Split Dollar Agreement and
Amendment thereto between Portsmouth Savings Bank and
Robert W. Simpson; and Deferred Compensation
Agreement between Portsmouth Savings Bank and Robert
W. Simpson, are each incorporated herein by reference
to Item 16, Exhibit 10.3 to the Company's Registra-
tion Statement, registration number 33-18714, on Form
S-1, filed with the Securities and Exchange
Commission on November 25, 1987.
(d) Employment Agreements among Portsmouth Bank Shares,
Inc., Portsmouth Savings Bank and each of William H.
Little, Rodney D. Pridham, Donald H. Sargent and Mark
E. Simpson are incorporated herein by reference to
Item 14, Exhibit 10(d) to the Company's Annual Report
on Form 10-K filed with the Securities and Exchange
Commission on March 30, 1990.
(e) Portsmouth Bank Shares, Inc. 1987 Stock Option and
Appreciation Rights Plan is incorporated herein by
reference to Item 16, Exhibit 10.4 to the Company's
Registration Statement registration number 33-18714,
on Form S-1, filed with the Securities and Exchange
Commission on November 25, 1987.
(f) Portsmouth Savings Bank Employee Stock Ownership Plan
and Trust is incorporated herein by reference to Item
16, Exhibit 10.5 to the Company's Registration
Statement, registration number 33-18714, on Form S-1,
filed with the Securities and Exchange Commission on
November 25, 1987.
(c) (11) Computation of Per Share Earnings: The computation
of per share earnings is contained under the heading
"Consolidated Statements of Income" on page 12 of the
Company's 1995 Annual
27
<PAGE> 32
Report to Stockholders, filed as Exhibit 13 hereto,
which page is incorporated herein by reference.
(c) (12) Statements re Computation of Ratios: Not
applicable, as the Company does not have any debt
securities or preferred stock registered under
Section 12 of the Securities Exchange Act of 1934.
(c) (13) Annual Report to Security Holders: The Company's
1995 Annual Report to Stockholders' is attached
hereto as Exhibit 13 to this Annual Report on Form
10-K.
(c) (23) Definitive Proxy Statement: The Company's definitive
Proxy Statement for the 1996 Annual Meeting of
Stockholders is attached hereto as Exhibit 21 to this
Annual Report on Form 10-K.
(c) (22) Subsidiaries of Registrant: As of March 15, 1996,
the Company had the following subsidiary:
Name State of Incorporation
---- ----------------------
Portsmouth Savings Bank New Hampshire
28
<PAGE> 33
SHATSWELL, MacLEOD & COMPANY
Certified Public Accountants
83 Pine Street
West Peabody, MA 01960-3635(508)535-0206
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Portsmouth Bank Shares, Inc. and subsidiary on Form S-8 (File No.
33-24050) of our report dated January 16, 1996 on our examination of the
consolidated financial statement schedules of Portsmouth Bank Shares, Inc. and
Subsidiary as of December 31, 1995 and 1994, and for each of the fiscal years
ended December 31, 1995, 1994 and 1993, which report is incorporated by
reference in this Annual Report on Form 10-K.
SHATSWELL, MacLEOD & CO.
W. Peabody, Massachusetts
March 25, 1996
29
<PAGE> 34
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities and Exchange Commission Act of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
30
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PORTSMOUTH BANK SHARES, INC.
By:/s/ Harry R. Hart By: /s/ Mark E. Simpson
----------------------------- -----------------------
Harry R. Hart Mark E. Simpson
President and Secretary and Treasurer
Chief Executive Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Robert W. Simpson Chairman of the Board March 21, 1996
- ---------------------- of Directors, Portsmouth
Robert W. Simpson Bank Shares, Inc.
/s/ Lester A. Avery Director of Portsmouth March 21, 1996
- ---------------------- Bank Shares, Inc.
Lester A. Avery
/s/ Timothy J. Connors Director of Portsmouth March 21, 1996
- ---------------------- Bank Shares, Inc.
Timothy J. Connors
/s/ Harry R. Hart Director, President and March 21, 1996
- ---------------------- Chief Executive Officer
Harry R. Hart
/s/ Harry P. Jarvis Director of Portsmouth March 21, 1996
- ---------------------- Bank Shares, Inc.
Harry P. Jarvis
/s/ M. Kevin MacLeod Director of Portsmouth March 21, 1996
- ---------------------- Bank Shares, Inc.
M. Kevin MacLeod
/s/ Mark E. Simpson Director, Secretary March 21, 1996
- ---------------------- and Treasurer
Mark E. Simpson
31
<PAGE> 36
Exhibits
(3) Articles of Incorporation and By-Laws:
(a) The Articles of Incorporation as amended of the Company are
incorporated by reference to Item 14, Exhibit 3 (a) to the
Company's 1990 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 1991.
(b) The By-Laws of the Company are incorporated herein by
reference to Item 14, Exhibit 3(b) to the Company's 1988
Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 31, 1989.
(4) Instruments Defining the Rights of Security Holders:
(a) The Articles of Incorporation as amended of the Company are
incorporated by reference to Item 14, Exhibit 3 (a) to the
Company's 1990 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 1991.
(b) The By-Laws of the Company are incorporated herein by
reference to Item 14, Exhibit 3(b) to the Company's 1988
Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 31, 1989.
(c) The Rights Agreement, between the Company and The First
National Bank of Boston, dated as of November 17, 1988, is
incorporated herein by reference to Item 2.1 to the Company's
Registration Statement on Form 8-A filed with the Securities
and Exchange Commission on November 30, 1988.
(10) Material Contracts:
(a) Agreement among Portsmouth Bank Shares, Inc., Portsmouth
Savings Bank and Robert W. Simpson is incorporated herein by
reference to Item 16, Exhibit 10.2 to the Company's
Registration Statement, registration number 33-18714, on Form
S-1, filed with the Securities and Exchange Commission on
November 25, 1987.
(b) Amended and Restated Agreement among Portsmouth Bank Shares,
Inc., Portsmouth Savings Bank and Robert W. Simpson is
incorporated herein by reference to Item 14, Exhibit 10(b) to
the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 1990.
(c) Employment Agreement between Portsmouth Savings Bank and
Robert W. Simpson; Split Dollar Agreement and Amendment
thereto between Portsmouth Savings Bank and Robert W. Simpson;
and Deferred Compensation Agreement between Portsmouth Savings
Bank and Robert W. Simpson, are each incorporated herein by
reference to Item 16, Exhibit 10.3 to the Company's Registra-
tion Statement, registration number 33-18714, on Form S-1,
filed with the Securities and Exchange Commission on November
25, 1987.
(d) Employment Agreements among Portsmouth Bank Shares, Inc.,
32
<PAGE> 37
Portsmouth Savings Bank and each of William H. Little, Rodney
D. Pridham, Donald H. Sargent and Mark E. Simpson are
incorporated herein by reference to Item 14, Exhibit 10(d) to
the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 1990.
(e) Portsmouth Bank Shares, Inc. 1987 Stock Option and
Appreciation Rights Plan is incorporated herein by reference
to Item 16, Exhibit 10.4 to the Company's Registration
Statement, registration number 33-18714, on Form S-1, filed
with the Securities and Exchange Commission on November 25,
1987.
(f) Portsmouth Savings Bank Employee Stock Ownership Plan and
Trust is incorporated herein by reference to Item 16, Exhibit
10.5 to the Company's Registration Statement, registration
number 33-18714, on Form S-1, filed with the Securities and
Exchange Commission on November 25, 1987.
(11) Computation of Per Share Earnings: The computation of per
share earnings is contained under the heading "Consolidated
Statements of Income" on page 12 of the Company's 1995 Annual
Report to Stockholders, filed as Exhibit 13 hereto, which page
is incorporated herein by reference.
(12) Statements re Computation of Ratios: Not applicable, as the
Company does not have any debt securities or preferred stock
registered under Section 12 of the Securities Exchange Act of
1934.
(13) Annual Report to Security Holders: The Company's 1995 Annual
Report to Stockholders' is attached hereto as Exhibit 13 to
this Annual Report on Form 10-K.
(23) Definitive Proxy Statement: The Company's definitive Proxy
Statement for the 1996 Annual Meeting of Stockholders is
attached hereto as Exhibit 21 to this Annual Report on Form
10-K.
(22) Subsidiaries of Registrant: As of March 15, 1996, the Company
had the following subsidiary:
Name State of Incorporation
---- ----------------------
Portsmouth Savings Bank New Hampshire
33
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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